Beijing Zhongkehaixun Digital S&T Co., Ltd.'s (SZSE:300810) 62% Price Boost Is Out Of Tune With Revenues

Beijing Zhongkehaixun Digital S&T Co., Ltd. (SZSE:300810) shareholders are no doubt pleased to see that the share price has bounced 62% in the last month, although it is still struggling to make up recently lost ground. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 9.6% over the last year.

Following the firm bounce in price, Beijing Zhongkehaixun Digital S&T's price-to-sales (or "P/S") ratio of 10.1x might make it look like a sell right now compared to the wider Aerospace & Defense industry in China, where around half of the companies have P/S ratios below 7.1x and even P/S below 3x are quite common. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Beijing Zhongkehaixun Digital S&T

How Beijing Zhongkehaixun Digital S&T Has Been Performing

Revenue has risen firmly for Beijing Zhongkehaixun Digital S&T 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.

Although there are no analyst estimates available for Beijing Zhongkehaixun Digital S&T, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Beijing Zhongkehaixun Digital S&T's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as high as Beijing Zhongkehaixun Digital S&T's is when the company's growth is on track to outshine the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 9.8% last year. Pleasingly, revenue has also lifted 47% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenues over that time.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 48% shows it's noticeably less attractive.

With this in mind, we find it worrying that Beijing Zhongkehaixun Digital S&T'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 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 Beijing Zhongkehaixun Digital S&T's P/S?

The large bounce in Beijing Zhongkehaixun Digital S&T's shares has lifted the company's P/S handsomely. 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 Beijing Zhongkehaixun Digital S&T 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. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Beijing Zhongkehaixun Digital S&T, and understanding them should be part of your investment process.

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.