There's Reason For Concern Over Guangdong Jinming Machinery Co., Ltd.'s (SZSE:300281) Massive 25% Price Jump

Guangdong Jinming Machinery Co., Ltd. (SZSE:300281) shareholders have had their patience rewarded with a 25% share price jump in the last month. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 3.0% in the last twelve months.

After such a large jump in price, you could be forgiven for thinking Guangdong Jinming Machinery is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 5.1x, considering almost half the companies in China's Machinery industry have P/S ratios below 2.4x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for Guangdong Jinming Machinery

What Does Guangdong Jinming Machinery's P/S Mean For Shareholders?

For example, consider that Guangdong Jinming Machinery'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. If not, then existing shareholders may be quite nervous about the viability of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Guangdong Jinming Machinery will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For Guangdong Jinming Machinery?

Guangdong Jinming Machinery's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 1.1%. As a result, revenue from three years ago have also fallen 9.6% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 23% shows it's an unpleasant look.

With this in mind, we find it worrying that Guangdong Jinming Machinery's P/S exceeds that of its industry peers. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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.

The Final Word

The strong share price surge has lead to Guangdong Jinming Machinery's P/S soaring as well. 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 Guangdong Jinming Machinery 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. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you settle on your opinion, we've discovered 2 warning signs for Guangdong Jinming Machinery (1 is potentially serious!) that you should be aware of.

If these risks are making you reconsider your opinion on Guangdong Jinming Machinery, 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.