Estun Automation Co., Ltd's (SZSE:002747) 32% Share Price Surge Not Quite Adding Up

Estun Automation Co., Ltd (SZSE:002747) shares have continued their recent momentum with a 32% gain in the last month alone. Notwithstanding the latest gain, the annual share price return of 2.1% isn't as impressive.

In spite of the firm bounce in price, it's still not a stretch to say that Estun Automation's price-to-sales (or "P/S") ratio of 3.5x right now seems quite "middle-of-the-road" compared to the Machinery industry in China, where the median P/S ratio is around 3.2x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Check out our latest analysis for Estun Automation

What Does Estun Automation's P/S Mean For Shareholders?

There hasn't been much to differentiate Estun Automation's and the industry's revenue growth lately. It seems that many are expecting the mediocre revenue performance to persist, which has held the P/S ratio back. If you like the company, you'd be hoping this can at least be maintained so that you could pick up some stock while it's not quite in favour.

Want the full picture on analyst estimates for the company? Then our free report on Estun Automation will help you uncover what's on the horizon.

What Are Revenue Growth Metrics Telling Us About The P/S?

Estun Automation's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 5.0%. This was backed up an excellent period prior to see revenue up by 57% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenues over that time.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 16% per annum over the next three years. Meanwhile, the rest of the industry is forecast to expand by 19% per annum, which is noticeably more attractive.

With this in mind, we find it intriguing that Estun Automation's P/S is closely matching its industry peers. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

What We Can Learn From Estun Automation's P/S?

Its shares have lifted substantially and now Estun Automation's P/S is back within range of the industry median. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

When you consider that Estun Automation's revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Estun Automation that you should be aware of.

If you're unsure about the strength of Estun Automation'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.