Jinlong Machinery & Electronic Co.,Ltd (SZSE:300032) Stock Rockets 33% As Investors Are Less Pessimistic Than Expected

The Jinlong Machinery & Electronic Co.,Ltd (SZSE:300032) share price has done very well over the last month, posting an excellent gain of 33%. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 18% over that time.

Since its price has surged higher, given close to half the companies operating in China's Electrical industry have price-to-sales ratios (or "P/S") below 2.5x, you may consider Jinlong Machinery & ElectronicLtd as a stock to potentially avoid with its 3x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

Check out our latest analysis for Jinlong Machinery & ElectronicLtd

How Has Jinlong Machinery & ElectronicLtd Performed Recently?

For example, consider that Jinlong Machinery & ElectronicLtd's financial performance has been poor lately as its revenue has been in decline. 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. However, if this isn't the case, investors might get caught out paying too much for the stock.

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 Jinlong Machinery & ElectronicLtd's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Jinlong Machinery & ElectronicLtd?

In order to justify its P/S ratio, Jinlong Machinery & ElectronicLtd would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered a frustrating 57% decrease to the company's top line. As a result, revenue from three years ago have also fallen 23% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 26% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that Jinlong Machinery & ElectronicLtd is trading at a P/S higher than the industry. 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 Jinlong Machinery & ElectronicLtd's P/S?

Jinlong Machinery & ElectronicLtd's P/S is on the rise since its shares have risen strongly. 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.

Our examination of Jinlong Machinery & ElectronicLtd revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Jinlong Machinery & ElectronicLtd that you need to be mindful of.

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.