Improved Revenues Required Before Foshan Golden Milky Way Intelligent Equipment Co., Ltd. (SZSE:300619) Stock's 27% Jump Looks Justified

Foshan Golden Milky Way Intelligent Equipment Co., Ltd. (SZSE:300619) shares have had a really impressive month, gaining 27% after a shaky period beforehand. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 7.0% in the last twelve months.

Although its price has surged higher, Foshan Golden Milky Way Intelligent Equipment's price-to-sales (or "P/S") ratio of 2.4x might still make it look like a buy right now compared to the Machinery industry in China, where around half of the companies have P/S ratios above 3.5x and even P/S above 7x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

See our latest analysis for Foshan Golden Milky Way Intelligent Equipment

What Does Foshan Golden Milky Way Intelligent Equipment's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Foshan Golden Milky Way Intelligent Equipment over the last year, which is not ideal at all. Perhaps the market believes the recent revenue performance isn't good enough to keep up the industry, causing the P/S ratio to suffer. Those who are bullish on Foshan Golden Milky Way Intelligent Equipment will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Foshan Golden Milky Way Intelligent Equipment will help you shine a light on its historical performance.

Do Revenue Forecasts Match The Low P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as low as Foshan Golden Milky Way Intelligent Equipment's is when the company's growth is on track to lag 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 33%. Even so, admirably revenue has lifted 65% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

This is in contrast to the rest of the industry, which is expected to grow by 23% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Foshan Golden Milky Way Intelligent Equipment is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

The Key Takeaway

Foshan Golden Milky Way Intelligent Equipment'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.

Our examination of Foshan Golden Milky Way Intelligent Equipment confirms that the company's revenue trends over the past three-year years are a key factor in its low price-to-sales ratio, as we suspected, given they fall short of current industry expectations. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Foshan Golden Milky Way Intelligent Equipment (at least 2 which are a bit concerning), and understanding these should be part of your investment process.

If these risks are making you reconsider your opinion on Foshan Golden Milky Way Intelligent Equipment, 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.