More Unpleasant Surprises Could Be In Store For Jikai Equipment Manufacturing Co., Ltd.'s (SZSE:002691) Shares After Tumbling 27%

To the annoyance of some shareholders, Jikai Equipment Manufacturing Co., Ltd. (SZSE:002691) shares are down a considerable 27% in the last month, which continues a horrid run for the company. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 26% share price drop.

Even after such a large drop in price, given around half the companies in China's Machinery industry have price-to-sales ratios (or "P/S") below 2.5x, you may still consider Jikai Equipment Manufacturing as a stock to avoid entirely with its 4.7x 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.

See our latest analysis for Jikai Equipment Manufacturing

What Does Jikai Equipment Manufacturing's Recent Performance Look Like?

For instance, Jikai Equipment Manufacturing's receding revenue in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Jikai Equipment Manufacturing's earnings, revenue and cash flow.

How Is Jikai Equipment Manufacturing's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Jikai Equipment Manufacturing's is when the company's growth is on track to outshine the industry decidedly.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 10%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 23% overall rise in revenue. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 24% shows it's noticeably less attractive.

In light of this, it's alarming that Jikai Equipment Manufacturing'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 Bottom Line On Jikai Equipment Manufacturing's P/S

Even after such a strong price drop, Jikai Equipment Manufacturing's P/S still exceeds the industry median significantly. 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 Jikai Equipment Manufacturing 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 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Jikai Equipment Manufacturing (at least 1 which makes us a bit uncomfortable), and understanding them should be part of your investment process.

If these risks are making you reconsider your opinion on Jikai Equipment Manufacturing, 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.