Optimistic Investors Push JC Finance & Tax Interconnect Holdings Ltd. (SZSE:002530) Shares Up 26% But Growth Is Lacking

Those holding JC Finance & Tax Interconnect Holdings Ltd. (SZSE:002530) shares would be relieved that the share price has rebounded 26% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 2.5% over the last year.

Following the firm bounce in price, given around half the companies in China's Machinery industry have price-to-sales ratios (or "P/S") below 2.7x, you may consider JC Finance & Tax Interconnect Holdings as a stock to avoid entirely with its 5.4x 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.

See our latest analysis for JC Finance & Tax Interconnect Holdings

How Has JC Finance & Tax Interconnect Holdings Performed Recently?

For instance, JC Finance & Tax Interconnect Holdings' receding revenue in recent times would have to be some food for thought. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. 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 JC Finance & Tax Interconnect Holdings, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is JC Finance & Tax Interconnect Holdings' Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like JC Finance & Tax Interconnect Holdings' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 3.7% decrease to the company's top line. As a result, revenue from three years ago have also fallen 2.4% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 28% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that JC Finance & Tax Interconnect Holdings' P/S exceeds that of its industry peers. 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.

What We Can Learn From JC Finance & Tax Interconnect Holdings' P/S?

The strong share price surge has lead to JC Finance & Tax Interconnect Holdings' P/S soaring as well. 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 JC Finance & Tax Interconnect Holdings currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. 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.

We don't want to rain on the parade too much, but we did also find 1 warning sign for JC Finance & Tax Interconnect Holdings that you need to be mindful of.

If these risks are making you reconsider your opinion on JC Finance & Tax Interconnect Holdings, 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.