Guangzhou Risong Intelligent Technology Holding Co., Ltd.'s (SHSE:688090) Shares Climb 30% But Its Business Is Yet to Catch Up

Despite an already strong run, Guangzhou Risong Intelligent Technology Holding Co., Ltd. (SHSE:688090) shares have been powering on, with a gain of 30% in the last thirty days. The last month tops off a massive increase of 215% in the last year.

After such a large jump in price, when almost half of the companies in China's Machinery industry have price-to-sales ratios (or "P/S") below 3.2x, you may consider Guangzhou Risong Intelligent Technology Holding as a stock not worth researching with its 6.3x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Guangzhou Risong Intelligent Technology Holding

How Guangzhou Risong Intelligent Technology Holding Has Been Performing

Revenue has risen firmly for Guangzhou Risong Intelligent Technology Holding recently, which is pleasing to see. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. However, if this isn't the case, investors might get caught out paying too much for the stock.

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.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Guangzhou Risong Intelligent Technology Holding would need to produce outstanding growth that's well in excess of the industry.

Taking a look back first, we see that the company grew revenue by an impressive 22% last year. As a result, it also grew revenue by 19% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

This is in contrast to the rest of the industry, which is expected to grow by 25% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Guangzhou Risong Intelligent Technology Holding is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

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

The strong share price surge has lead to Guangzhou Risong Intelligent Technology Holding's P/S soaring as well. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of Guangzhou Risong Intelligent Technology Holding revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. 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.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Guangzhou Risong Intelligent Technology Holding (2 are a bit unpleasant!) that you should be aware of before investing here.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.