Optimistic Investors Push ZheJiang KangLongDa Special Protection Technology Co., Ltd (SHSE:603665) Shares Up 25% But Growth Is Lacking

Despite an already strong run, ZheJiang KangLongDa Special Protection Technology Co., Ltd (SHSE:603665) shares have been powering on, with a gain of 25% in the last thirty days. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 24% in the last twelve months.

Following the firm bounce in price, you could be forgiven for thinking ZheJiang KangLongDa Special Protection Technology is a stock not worth researching with a price-to-sales ratios (or "P/S") of 2.4x, considering almost half the companies in China's Luxury industry have P/S ratios below 1.7x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

View our latest analysis for ZheJiang KangLongDa Special Protection Technology

What Does ZheJiang KangLongDa Special Protection Technology's P/S Mean For Shareholders?

For instance, ZheJiang KangLongDa Special Protection Technology's receding revenue in recent times would have to be some food for thought. 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. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on ZheJiang KangLongDa Special Protection Technology will help you shine a light on its historical performance.

How Is ZheJiang KangLongDa Special Protection Technology's Revenue Growth Trending?

There's an inherent assumption that a company should outperform the industry for P/S ratios like ZheJiang KangLongDa Special Protection Technology's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 31% decrease to the company's top line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 23% overall rise in revenue. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

This is in contrast to the rest of the industry, which is expected to grow by 15% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in mind, we find it worrying that ZheJiang KangLongDa Special Protection Technology's P/S exceeds that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. 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 Bottom Line On ZheJiang KangLongDa Special Protection Technology's P/S

ZheJiang KangLongDa Special Protection Technology shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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.

The fact that ZheJiang KangLongDa Special Protection 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. 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 there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Plus, you should also learn about these 2 warning signs we've spotted with ZheJiang KangLongDa Special Protection Technology.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.