Ningbo Daye Garden Machinery Co.,Ltd.'s (SZSE:300879) 25% Price Boost Is Out Of Tune With Revenues

Ningbo Daye Garden Machinery Co.,Ltd. (SZSE:300879) shareholders would be excited to see that the share price has had a great month, posting a 25% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 21% over that time.

Since its price has surged higher, you could be forgiven for thinking Ningbo Daye Garden MachineryLtd is a stock not worth researching with a price-to-sales ratios (or "P/S") of 2.3x, considering almost half the companies in China's Consumer Durables industry have P/S ratios below 1.6x. 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 Ningbo Daye Garden MachineryLtd

How Ningbo Daye Garden MachineryLtd Has Been Performing

Ningbo Daye Garden MachineryLtd has been doing a decent job lately as it's been growing revenue at a reasonable pace. It might be that many expect the reasonable 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.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Ningbo Daye Garden MachineryLtd will help you shine a light on its historical performance.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Ningbo Daye Garden MachineryLtd would need to produce impressive growth in excess of the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 3.5% last year. The latest three year period has also seen a 7.3% overall rise in revenue, aided somewhat by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 11% shows it's noticeably less attractive.

In light of this, it's alarming that Ningbo Daye Garden MachineryLtd's P/S sits above the majority of other companies. 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 Ningbo Daye Garden MachineryLtd's P/S

Ningbo Daye Garden MachineryLtd shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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.

The fact that Ningbo Daye Garden MachineryLtd 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. 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.

We don't want to rain on the parade too much, but we did also find 4 warning signs for Ningbo Daye Garden MachineryLtd (3 are significant!) that you need to be mindful of.

If you're unsure about the strength of Ningbo Daye Garden MachineryLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com