Kunshan TopA Intelligent Equipment Co.,Ltd's (SZSE:300836) 26% Price Boost Is Out Of Tune With Revenues

Despite an already strong run, Kunshan TopA Intelligent Equipment Co.,Ltd (SZSE:300836) shares have been powering on, with a gain of 26% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 90% in the last year.

Since its price has surged higher, given around half the companies in China's Machinery industry have price-to-sales ratios (or "P/S") below 3.3x, you may consider Kunshan TopA Intelligent EquipmentLtd as a stock to avoid entirely with its 5.9x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for Kunshan TopA Intelligent EquipmentLtd

How Has Kunshan TopA Intelligent EquipmentLtd Performed Recently?

The revenue growth achieved at Kunshan TopA Intelligent EquipmentLtd over the last year would be more than acceptable for most companies. Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up. 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 Kunshan TopA Intelligent EquipmentLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Kunshan TopA Intelligent EquipmentLtd's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Kunshan TopA Intelligent EquipmentLtd's to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 7.7% last year. The latest three year period has also seen an excellent 59% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing revenues over that time.

Comparing that to the industry, which is predicted to deliver 26% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this information, we find it concerning that Kunshan TopA Intelligent EquipmentLtd 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. 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 Kunshan TopA Intelligent EquipmentLtd's P/S soaring as well. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

The fact that Kunshan TopA Intelligent EquipmentLtd 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.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Kunshan TopA Intelligent EquipmentLtd (1 doesn't sit too well with us!) that you need to be mindful 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.