Getting In Cheap On Jiangxi Xinyu Guoke Technology Co., Ltd (SZSE:300722) Is Unlikely

When you see that almost half of the companies in the Aerospace & Defense industry in China have price-to-sales ratios (or "P/S") below 8.7x, Jiangxi Xinyu Guoke Technology Co., Ltd (SZSE:300722) looks to be giving off strong sell signals with its 19.6x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

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View our latest analysis for Jiangxi Xinyu Guoke Technology

How Jiangxi Xinyu Guoke Technology Has Been Performing

Revenue has risen firmly for Jiangxi Xinyu Guoke Technology recently, which is pleasing to see. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders may be a little nervous about the viability of the share price.

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 Jiangxi Xinyu Guoke Technology's earnings, revenue and cash flow.

How Is Jiangxi Xinyu Guoke Technology's Revenue Growth Trending?

Jiangxi Xinyu Guoke Technology'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.

Retrospectively, the last year delivered an exceptional 23% gain to the company's top line. Pleasingly, revenue has also lifted 53% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 64% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Jiangxi Xinyu Guoke Technology is trading at a P/S higher than the industry. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What We Can Learn From Jiangxi Xinyu Guoke Technology's P/S?

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.

The fact that Jiangxi Xinyu Guoke Technology currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. 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.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Jiangxi Xinyu Guoke Technology with six simple checks on some of these key factors.

If you're unsure about the strength of Jiangxi Xinyu Guoke Technology's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.