Revenues Not Telling The Story For Beijing Zhongkehaixun Digital S&T Co., Ltd. (SZSE:300810) After Shares Rise 39%

Beijing Zhongkehaixun Digital S&T Co., Ltd. (SZSE:300810) shares have continued their recent momentum with a 39% gain in the last month alone. Notwithstanding the latest gain, the annual share price return of 8.5% isn't as impressive.

After such a large jump in price, you could be forgiven for thinking Beijing Zhongkehaixun Digital S&T is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 13.5x, considering almost half the companies in China's Aerospace & Defense industry have P/S ratios below 7.1x. 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.

Check out our latest analysis for Beijing Zhongkehaixun Digital S&T

How Beijing Zhongkehaixun Digital S&T Has Been Performing

As an illustration, revenue has deteriorated at Beijing Zhongkehaixun Digital S&T over the last year, which is not ideal at all. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Beijing Zhongkehaixun Digital S&T will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For Beijing Zhongkehaixun Digital S&T?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Beijing Zhongkehaixun Digital S&T's to be considered reasonable.

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 8.3%. This means it has also seen a slide in revenue over the longer-term as revenue is down 8.2% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 39% shows it's an unpleasant look.

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. 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.

The Final Word

The strong share price surge has lead to Beijing Zhongkehaixun Digital S&T's P/S soaring as well. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Beijing Zhongkehaixun Digital S&T currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. 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.

You should always think about risks. Case in point, we've spotted 2 warning signs for Beijing Zhongkehaixun Digital S&T you should be aware of.

If these risks are making you reconsider your opinion on Beijing Zhongkehaixun Digital S&T, 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.