Revenues Not Telling The Story For ZheJiang KangLongDa Special Protection Technology Co., Ltd (SHSE:603665) After Shares Rise 25%

ZheJiang KangLongDa Special Protection Technology Co., Ltd (SHSE:603665) shareholders are no doubt pleased to see that the share price has bounced 25% in the last month, although it is still struggling to make up recently lost ground. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 7.6% over the last year.

After such a large jump 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 2.2x, considering almost half the companies in China's Luxury industry have P/S ratios below 1.5x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

Check out our latest analysis for ZheJiang KangLongDa Special Protection Technology

What Does ZheJiang KangLongDa Special Protection Technology's Recent Performance Look Like?

As an illustration, revenue has deteriorated at ZheJiang KangLongDa Special Protection Technology over the last year, which is not ideal at all. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. 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 ZheJiang KangLongDa Special Protection Technology's earnings, revenue and cash flow.

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

The only time you'd be truly comfortable seeing a P/S as high as ZheJiang KangLongDa Special Protection Technology's is when the company's growth is on track to outshine the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 31%. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 23% in total. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Comparing that to the industry, which is predicted to deliver 14% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this information, we find it concerning that ZheJiang KangLongDa Special Protection Technology is trading at a P/S higher than the industry. 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 Key Takeaway

The large bounce in ZheJiang KangLongDa Special Protection Technology's shares has lifted the company's P/S handsomely. 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 ZheJiang KangLongDa Special Protection Technology revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. 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.

It is also worth noting that we have found 2 warning signs for ZheJiang KangLongDa Special Protection Technology that you need to take into consideration.

If you're unsure about the strength of ZheJiang KangLongDa Special Protection Technology'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.