Guangdong Topstar Technology Co., Ltd. (SZSE:300607) Shares Fly 44% But Investors Aren't Buying For Growth

Guangdong Topstar Technology Co., Ltd. (SZSE:300607) shares have had a really impressive month, gaining 44% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 10% over that time.

Although its price has surged higher, Guangdong Topstar Technology may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 1.4x, since almost half of all companies in the Machinery industry in China have P/S ratios greater than 2.8x and even P/S higher than 5x are not unusual. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Guangdong Topstar Technology

How Guangdong Topstar Technology Has Been Performing

Guangdong Topstar Technology could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. It seems that many are expecting the poor revenue performance to persist, which has repressed the P/S ratio. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Keen to find out how analysts think Guangdong Topstar Technology's future stacks up against the industry? In that case, our free report is a great place to start.

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

In order to justify its P/S ratio, Guangdong Topstar Technology would need to produce sluggish growth that's trailing 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%. Still, the latest three year period has seen an excellent 49% overall rise in revenue, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Turning to the outlook, the next year should bring diminished returns, with revenue decreasing 3.4% as estimated by the three analysts watching the company. That's not great when the rest of the industry is expected to grow by 23%.

With this in consideration, we find it intriguing that Guangdong Topstar Technology's P/S is closely matching its industry peers. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

What Does Guangdong Topstar Technology's P/S Mean For Investors?

Guangdong Topstar Technology's stock price has surged recently, but its but its P/S still remains modest. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

It's clear to see that Guangdong Topstar Technology maintains its low P/S on the weakness of its forecast for sliding revenue, as expected. As other companies in the industry are forecasting revenue growth, Guangdong Topstar Technology's poor outlook justifies its low P/S ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Guangdong Topstar Technology that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.