There's Reason For Concern Over Kale Environment Technology (Shanghai) Co., Ltd.'s (SZSE:301070) Massive 37% Price Jump

Despite an already strong run, Kale Environment Technology (Shanghai) Co., Ltd. (SZSE:301070) shares have been powering on, with a gain of 37% in the last thirty days. Taking a wider view, although not as strong as the last month, the full year gain of 18% is also fairly reasonable.

After such a large jump in price, given around half the companies in China's Machinery industry have price-to-sales ratios (or "P/S") below 2.7x, you may consider Kale Environment Technology (Shanghai) as a stock to avoid entirely with its 7.5x P/S ratio. 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.

View our latest analysis for Kale Environment Technology (Shanghai)

What Does Kale Environment Technology (Shanghai)'s P/S Mean For Shareholders?

The revenue growth achieved at Kale Environment Technology (Shanghai) 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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 Kale Environment Technology (Shanghai)'s earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Kale Environment Technology (Shanghai)'s to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 20%. Pleasingly, revenue has also lifted 43% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 25% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

In light of this, it's alarming that Kale Environment Technology (Shanghai)'s P/S sits above the majority of other companies. 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.

What We Can Learn From Kale Environment Technology (Shanghai)'s P/S?

Shares in Kale Environment Technology (Shanghai) have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

Our examination of Kale Environment Technology (Shanghai) revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

We don't want to rain on the parade too much, but we did also find 4 warning signs for Kale Environment Technology (Shanghai) (3 don't sit too well with us!) that you need to be mindful of.

If you're unsure about the strength of Kale Environment Technology (Shanghai)'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.