Guangzhou Risong Intelligent Technology Holding Co., Ltd. (SHSE:688090) Stock Rockets 33% As Investors Are Less Pessimistic Than Expected

Guangzhou Risong Intelligent Technology Holding Co., Ltd. (SHSE:688090) shares have continued their recent momentum with a 33% gain in the last month alone. The annual gain comes to 136% following the latest surge, making investors sit up and take notice.

After such a large jump in price, you could be forgiven for thinking Guangzhou Risong Intelligent Technology Holding is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 5.1x, considering almost half the companies in China's Machinery industry have P/S ratios below 2.5x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for Guangzhou Risong Intelligent Technology Holding

How Has Guangzhou Risong Intelligent Technology Holding Performed Recently?

Guangzhou Risong Intelligent Technology Holding has been doing a good job lately as it's been growing revenue at a solid pace. Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Although there are no analyst estimates available for Guangzhou Risong Intelligent Technology Holding, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Guangzhou Risong Intelligent Technology Holding's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Guangzhou Risong Intelligent Technology Holding's to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 9.2% last year. The solid recent performance means it was also able to grow revenue by 15% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 23% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that Guangzhou Risong Intelligent Technology Holding's P/S sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What We Can Learn From Guangzhou Risong Intelligent Technology Holding's P/S?

Shares in Guangzhou Risong Intelligent Technology Holding have seen a strong upwards swing lately, which has really helped boost its P/S figure. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

The fact that Guangzhou Risong Intelligent Technology Holding currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Having said that, be aware Guangzhou Risong Intelligent Technology Holding is showing 3 warning signs in our investment analysis, and 2 of those are significant.

If these risks are making you reconsider your opinion on Guangzhou Risong Intelligent Technology Holding, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.