Lacklustre Performance Is Driving Kailong High Technology Co., Ltd.'s (SZSE:300912) 25% Price Drop

Unfortunately for some shareholders, the Kailong High Technology Co., Ltd. (SZSE:300912) share price has dived 25% in the last thirty days, prolonging recent pain. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 40% share price drop.

Since its price has dipped substantially, Kailong High Technology's price-to-sales (or "P/S") ratio of 1.3x might 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 2.6x and even P/S above 5x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

View our latest analysis for Kailong High Technology

How Has Kailong High Technology Performed Recently?

Recent times have been quite advantageous for Kailong High Technology as its revenue has been rising very briskly. It might be that many expect the strong revenue performance to degrade substantially, which has repressed the P/S ratio. Those who are bullish on Kailong High Technology 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 Kailong High Technology will help you shine a light on its historical performance.

Is There Any Revenue Growth Forecasted For Kailong High Technology?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Kailong High Technology's to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 56%. However, this wasn't enough as the latest three year period has seen the company endure a nasty 19% drop in revenue in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 24% shows it's an unpleasant look.

With this information, we are not surprised that Kailong High Technology is trading at a P/S lower than the industry. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

The Key Takeaway

Kailong High Technology's recently weak share price has pulled its P/S back below other Machinery companies. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Kailong High Technology confirms that the company's shrinking revenue over the past medium-term is a key factor in its low price-to-sales ratio, given the industry is projected to grow. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Given the current circumstances, it seems unlikely that the share price will experience any significant movement in either direction in the near future if recent medium-term revenue trends persist.

You always need to take note of risks, for example - Kailong High Technology has 2 warning signs we think you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.