Zhejiang FORE Intelligent Technology Co.,Ltd's (SZSE:301368) 34% Share Price Surge Not Quite Adding Up

Zhejiang FORE Intelligent Technology Co.,Ltd (SZSE:301368) shareholders would be excited to see that the share price has had a great month, posting a 34% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 96% 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 3.1x, you may consider Zhejiang FORE Intelligent TechnologyLtd as a stock to avoid entirely with its 14.2x 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.

View our latest analysis for Zhejiang FORE Intelligent TechnologyLtd

What Does Zhejiang FORE Intelligent TechnologyLtd's Recent Performance Look Like?

The revenue growth achieved at Zhejiang FORE Intelligent TechnologyLtd 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. However, if this isn't the case, investors might get caught out paying too much for the stock.

Although there are no analyst estimates available for Zhejiang FORE Intelligent TechnologyLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as steep as Zhejiang FORE Intelligent TechnologyLtd's is when the company's growth is on track to outshine the industry decidedly.

If we review the last year of revenue growth, the company posted a terrific increase of 22%. Still, revenue has fallen 15% in total from three years ago, which is quite disappointing. 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 22% shows it's an unpleasant look.

In light of this, it's alarming that Zhejiang FORE Intelligent TechnologyLtd's P/S sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What We Can Learn From Zhejiang FORE Intelligent TechnologyLtd's P/S?

Zhejiang FORE Intelligent TechnologyLtd's P/S has grown nicely over the last month thanks to a handy boost in the share price. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of Zhejiang FORE Intelligent TechnologyLtd revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. 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. 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.

Having said that, be aware Zhejiang FORE Intelligent TechnologyLtd is showing 4 warning signs in our investment analysis, and 2 of those are a bit concerning.

If you're unsure about the strength of Zhejiang FORE Intelligent TechnologyLtd'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.