There's Reason For Concern Over ShenZhen QiangRui Precision Technology Co., Ltd.'s (SZSE:301128) Massive 58% Price Jump

ShenZhen QiangRui Precision Technology Co., Ltd. (SZSE:301128) shares have had a really impressive month, gaining 58% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 48% in the last year.

Following the firm bounce 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 ShenZhen QiangRui Precision Technology as a stock to avoid entirely with its 7.2x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for ShenZhen QiangRui Precision Technology

How Has ShenZhen QiangRui Precision Technology Performed Recently?

ShenZhen QiangRui Precision Technology has been doing a decent job lately as it's been growing revenue at a reasonable pace. One possibility is that the P/S ratio is high because investors think this good revenue growth will be enough to outperform the broader industry in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

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 ShenZhen QiangRui Precision Technology'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 ShenZhen QiangRui Precision Technology's to be considered reasonable.

Retrospectively, the last year delivered a decent 4.7% gain to the company's revenues. The latest three year period has also seen a 17% overall rise in revenue, aided somewhat by its short-term performance. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 28% shows it's noticeably less attractive.

In light of this, it's alarming that ShenZhen QiangRui Precision Technology's P/S sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. 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 Does ShenZhen QiangRui Precision Technology's P/S Mean For Investors?

ShenZhen QiangRui Precision Technology's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

The fact that ShenZhen QiangRui Precision Technology 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 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 3 warning signs for ShenZhen QiangRui Precision Technology that you need to be mindful of.

If these risks are making you reconsider your opinion on ShenZhen QiangRui Precision Technology, 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.