Guangzhou Risong Intelligent Technology Holding Co., Ltd.'s (SHSE:688090) 26% Price Boost Is Out Of Tune With Revenues

Guangzhou Risong Intelligent Technology Holding Co., Ltd. (SHSE:688090) shareholders are no doubt pleased to see that the share price has bounced 26% in the last month, although it is still struggling to make up recently lost ground. The last month tops off a massive increase of 188% in the last year.

Since its price has surged higher, given close to half the companies operating in China's Machinery industry have price-to-sales ratios (or "P/S") below 3.3x, you may consider Guangzhou Risong Intelligent Technology Holding as a stock to potentially avoid with its 4.3x P/S ratio. However, the P/S might be 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

What Does Guangzhou Risong Intelligent Technology Holding's P/S Mean For Shareholders?

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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Guangzhou Risong Intelligent Technology Holding will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For Guangzhou Risong Intelligent Technology Holding?

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

Retrospectively, the last year delivered an exceptional 22% gain to the company's top line. Revenue has also lifted 19% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Comparing that to the industry, which is predicted to deliver 22% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this information, we find it concerning that Guangzhou Risong Intelligent Technology Holding is trading at a P/S higher than the industry. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. 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.

The Final Word

The large bounce in Guangzhou Risong Intelligent Technology Holding's shares has lifted the company's P/S handsomely. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

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 see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

Before you settle on your opinion, we've discovered 3 warning signs for Guangzhou Risong Intelligent Technology Holding (1 makes us a bit uncomfortable!) that you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.