Kennede Electronics MFG. Co., Ltd. (SZSE:002723) Shares Fly 29% But Investors Aren't Buying For Growth

The Kennede Electronics MFG. Co., Ltd. (SZSE:002723) share price has done very well over the last month, posting an excellent gain of 29%. Taking a wider view, although not as strong as the last month, the full year gain of 13% is also fairly reasonable.

In spite of the firm bounce in price, Kennede Electronics MFG may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 1.8x, since almost half of all companies in the Electrical industry in China have P/S ratios greater than 2.6x and even P/S higher than 5x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

Check out our latest analysis for Kennede Electronics MFG

How Kennede Electronics MFG Has Been Performing

For instance, Kennede Electronics MFG's receding revenue in recent times would have to be some food for thought. Perhaps the market believes the recent revenue performance isn't good enough to keep up the industry, causing the P/S ratio to suffer. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

Although there are no analyst estimates available for Kennede Electronics MFG, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Kennede Electronics MFG's Revenue Growth Trending?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Kennede Electronics MFG's to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 14%. Regardless, revenue has managed to lift by a handy 14% in aggregate from three years ago, thanks to the earlier period of growth. 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 25% shows it's noticeably less attractive.

With this in consideration, it's easy to understand why Kennede Electronics MFG's P/S falls short of the mark set by its industry peers. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

What Does Kennede Electronics MFG's P/S Mean For Investors?

Kennede Electronics MFG's stock price has surged recently, but its but its P/S still remains modest. 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.

As we suspected, our examination of Kennede Electronics MFG revealed its three-year revenue trends are contributing to its low P/S, given they look worse than current industry expectations. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

Before you take the next step, you should know about the 1 warning sign for Kennede Electronics MFG that we have uncovered.

If you're unsure about the strength of Kennede Electronics MFG's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.