Kexin Development Co.,Ltd,Shanxi (SHSE:600234) Stock Rockets 31% As Investors Are Less Pessimistic Than Expected

Kexin Development Co.,Ltd,Shanxi (SHSE:600234) shares have continued their recent momentum with a 31% gain in the last month alone. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 44% over that time.

Following the firm bounce in price, you could be forgiven for thinking Kexin DevelopmentLtdShanxi is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 14.1x, considering almost half the companies in China's Consumer Durables industry have P/S ratios below 1.9x. 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 Kexin DevelopmentLtdShanxi

How Kexin DevelopmentLtdShanxi Has Been Performing

Revenue has risen firmly for Kexin DevelopmentLtdShanxi recently, which is pleasing to see. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. However, if this isn't the case, investors might get caught out paying too much for the stock.

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 Kexin DevelopmentLtdShanxi's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Kexin DevelopmentLtdShanxi?

Kexin DevelopmentLtdShanxi's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered an exceptional 20% gain to the company's top line. However, this wasn't enough as the latest three year period has seen the company endure a nasty 94% 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.

Comparing that to the industry, which is predicted to deliver 9.1% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we find it worrying that Kexin DevelopmentLtdShanxi's P/S exceeds that of its industry peers. 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.

The Final Word

The strong share price surge has lead to Kexin DevelopmentLtdShanxi's P/S soaring as well. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our examination of Kexin DevelopmentLtdShanxi 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. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

Before you take the next step, you should know about the 2 warning signs for Kexin DevelopmentLtdShanxi that we have uncovered.

If these risks are making you reconsider your opinion on Kexin DevelopmentLtdShanxi, 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.