Mingxin Automotive Leather Co., Ltd.'s (SHSE:605068) 27% Jump Shows Its Popularity With Investors

The Mingxin Automotive Leather Co., Ltd. (SHSE:605068) share price has done very well over the last month, posting an excellent gain of 27%. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 4.2% in the last twelve months.

Since its price has surged higher, given close to half the companies operating in China's Luxury industry have price-to-sales ratios (or "P/S") below 1.6x, you may consider Mingxin Automotive Leather as a stock to potentially avoid with its 2.6x P/S ratio. 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 Mingxin Automotive Leather

What Does Mingxin Automotive Leather's Recent Performance Look Like?

Mingxin Automotive Leather certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on analyst estimates for the company? Then our free report on Mingxin Automotive Leather will help you uncover what's on the horizon.

How Is Mingxin Automotive Leather's Revenue Growth Trending?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Mingxin Automotive Leather's to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 11% last year. Revenue has also lifted 30% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Shifting to the future, estimates from the dual analysts covering the company suggest revenue should grow by 26% over the next year. Meanwhile, the rest of the industry is forecast to only expand by 13%, which is noticeably less attractive.

With this in mind, it's not hard to understand why Mingxin Automotive Leather's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

The large bounce in Mingxin Automotive Leather's shares has lifted the company's P/S handsomely. 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 look into Mingxin Automotive Leather shows that its P/S ratio remains high on the merit of its strong future revenues. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless these conditions change, they will continue to provide strong support to the share price.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Mingxin Automotive Leather you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.