Optimistic Investors Push Jiangsu Maixinlin Aviation Science and Technology Corp. (SHSE:688685) Shares Up 26% But Growth Is Lacking

Jiangsu Maixinlin Aviation Science and Technology Corp. (SHSE:688685) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. The last month tops off a massive increase of 107% in the last year.

After such a large jump in price, when almost half of the companies in China's Aerospace & Defense industry have price-to-sales ratios (or "P/S") below 7.6x, you may consider Jiangsu Maixinlin Aviation Science and Technology as a stock not worth researching with its 14.7x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for Jiangsu Maixinlin Aviation Science and Technology

What Does Jiangsu Maixinlin Aviation Science and Technology's Recent Performance Look Like?

The revenue growth achieved at Jiangsu Maixinlin Aviation Science and Technology over the last year would be more than acceptable for most companies. One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be enough to outperform the broader industry in the near future. 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 Jiangsu Maixinlin Aviation Science and Technology will help you shine a light on its historical performance.

How Is Jiangsu Maixinlin Aviation Science and Technology's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Jiangsu Maixinlin Aviation Science and Technology's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 15% gain to the company's top line. Revenue has also lifted 20% in aggregate from three years ago, mostly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 53% shows it's noticeably less attractive.

In light of this, it's alarming that Jiangsu Maixinlin Aviation Science and Technology'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. 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 strong share price surge has lead to Jiangsu Maixinlin Aviation Science and Technology's P/S soaring as well. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

The fact that Jiangsu Maixinlin Aviation Science and Technology 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. 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 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.

Before you take the next step, you should know about the 3 warning signs for Jiangsu Maixinlin Aviation Science and Technology that we have uncovered.

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.

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.