Xi'an Tianhe Defense Technology Co., Ltd. (SZSE:300397) Stock Rockets 30% As Investors Are Less Pessimistic Than Expected

Xi'an Tianhe Defense Technology Co., Ltd. (SZSE:300397) shares have continued their recent momentum with a 30% gain in the last month alone. Taking a wider view, although not as strong as the last month, the full year gain of 16% is also fairly reasonable.

Following the firm bounce in price, Xi'an Tianhe Defense Technology may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 15.3x, when you consider almost half of the companies in the Aerospace & Defense industry in China have P/S ratios under 8.5x and even P/S lower than 3x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

See our latest analysis for Xi'an Tianhe Defense Technology

How Xi'an Tianhe Defense Technology Has Been Performing

For example, consider that Xi'an Tianhe Defense Technology'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 Xi'an Tianhe Defense Technology will help you shine a light on its historical performance.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Xi'an Tianhe Defense Technology would need to produce outstanding growth that's well in excess of the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 17%. As a result, revenue from three years ago have also fallen 63% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 27% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's alarming that Xi'an Tianhe Defense Technology's P/S sits above the majority of other companies. 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. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What We Can Learn From Xi'an Tianhe Defense Technology's P/S?

Shares in Xi'an Tianhe Defense Technology have seen a strong upwards swing lately, which has really helped boost its P/S figure. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that Xi'an Tianhe Defense Technology currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

Plus, you should also learn about these 3 warning signs we've spotted with Xi'an Tianhe Defense Technology.

If these risks are making you reconsider your opinion on Xi'an Tianhe Defense Technology, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.