Estun Automation Co., Ltd's (SZSE:002747) 41% Price Boost Is Out Of Tune With Revenues

Estun Automation Co., Ltd (SZSE:002747) shares have continued their recent momentum with a 41% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 57%.

Following the firm bounce in price, given close to half the companies operating in China's Machinery industry have price-to-sales ratios (or "P/S") below 3.5x, you may consider Estun Automation as a stock to potentially avoid with its 4.6x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

Check out our latest analysis for Estun Automation

How Has Estun Automation Performed Recently?

Estun Automation's revenue growth of late has been pretty similar to most other companies. It might be that many expect the mediocre revenue performance to strengthen positively, which has kept the P/S ratio from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

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.

How Is Estun Automation's Revenue Growth Trending?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Estun Automation's to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 5.0% last year. The latest three year period has also seen an excellent 57% overall rise in revenue, aided somewhat by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 15% each year during the coming three years according to the analysts following the company. With the industry predicted to deliver 18% growth per annum, the company is positioned for a weaker revenue result.

In light of this, it's alarming that Estun Automation's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

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

Estun Automation's P/S is on the rise since its shares have risen strongly. 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.

It comes as a surprise to see Estun Automation trade at such a high P/S given the revenue forecasts look less than stellar. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It is also worth noting that we have found 2 warning signs for Estun Automation (1 is a bit unpleasant!) that you need to take into consideration.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.