Some Confidence Is Lacking In Kexin Development Co.,Ltd,Shanxi (SHSE:600234) As Shares Slide 50%

The Kexin Development Co.,Ltd,Shanxi (SHSE:600234) share price has fared very poorly over the last month, falling by a substantial 50%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 40% share price drop.

Although its price has dipped substantially, given around half the companies in China's Consumer Durables industry have price-to-sales ratios (or "P/S") below 1.9x, you may still consider Kexin DevelopmentLtdShanxi as a stock to avoid entirely with its 9.3x 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 Kexin DevelopmentLtdShanxi

What Does Kexin DevelopmentLtdShanxi's P/S Mean For Shareholders?

For example, consider that Kexin DevelopmentLtdShanxi's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

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

Is There Enough Revenue Growth Forecasted For Kexin DevelopmentLtdShanxi?

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

Retrospectively, the last year delivered a frustrating 51% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 84% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 12% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's alarming that Kexin DevelopmentLtdShanxi'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. 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.

The Key Takeaway

Even after such a strong price drop, Kexin DevelopmentLtdShanxi's P/S still exceeds the industry median significantly. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

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. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

Before you settle on your opinion, we've discovered 2 warning signs for Kexin DevelopmentLtdShanxi that you should be aware of.

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.