Hangzhou Kaierda Welding Robot Co.,Ltd.'s (SHSE:688255) 45% Price Boost Is Out Of Tune With Revenues

Those holding Hangzhou Kaierda Welding Robot Co.,Ltd. (SHSE:688255) shares would be relieved that the share price has rebounded 45% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 28% in the last twelve months.

Following the firm bounce in price, given close to half the companies operating in China's Machinery industry have price-to-sales ratios (or "P/S") below 2.7x, you may consider Hangzhou Kaierda Welding RobotLtd as a stock to potentially avoid with its 4.4x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Hangzhou Kaierda Welding RobotLtd

What Does Hangzhou Kaierda Welding RobotLtd's Recent Performance Look Like?

Revenue has risen firmly for Hangzhou Kaierda Welding RobotLtd recently, which is pleasing to see. 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. If not, then existing shareholders may be a little nervous about the viability of the share price.

Although there are no analyst estimates available for Hangzhou Kaierda Welding RobotLtd, 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?

The only time you'd be truly comfortable seeing a P/S as high as Hangzhou Kaierda Welding RobotLtd's is when the company's growth is on track to outshine the industry.

Taking a look back first, we see that the company grew revenue by an impressive 22% last year. However, this wasn't enough as the latest three year period has seen the company endure a nasty 19% drop in revenue in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 27% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this information, we find it concerning that Hangzhou Kaierda Welding RobotLtd is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Key Takeaway

Hangzhou Kaierda Welding RobotLtd shares have taken a big step in a northerly direction, but its P/S is elevated as a result. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Hangzhou Kaierda Welding RobotLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you settle on your opinion, we've discovered 4 warning signs for Hangzhou Kaierda Welding RobotLtd (2 are concerning!) that you should be aware of.

If these risks are making you reconsider your opinion on Hangzhou Kaierda Welding RobotLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.