Revenues Not Telling The Story For Kunlun Tech Co., Ltd. (SZSE:300418) After Shares Rise 43%

Kunlun Tech Co., Ltd. (SZSE:300418) shares have had a really impressive month, gaining 43% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 69% in the last year.

After such a large jump in price, Kunlun Tech may be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 10.3x, since almost half of all companies in the Entertainment industry in China have P/S ratios under 6.8x and even P/S lower than 3x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

See our latest analysis for Kunlun Tech

How Has Kunlun Tech Performed Recently?

Recent times have been advantageous for Kunlun Tech as its revenues have been rising faster than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Keen to find out how analysts think Kunlun Tech's future stacks up against the industry? In that case, our free report is a great place to start.

What Are Revenue Growth Metrics Telling Us About The High P/S?

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

If we review the last year of revenue growth, the company posted a worthy increase of 7.2%. This was backed up an excellent period prior to see revenue up by 32% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenues over that time.

Turning to the outlook, the next year should generate growth of 9.7% as estimated by the four analysts watching the company. That's shaping up to be materially lower than the 35% growth forecast for the broader industry.

With this in consideration, we believe it doesn't make sense that Kunlun Tech's P/S is outpacing its industry peers. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Bottom Line On Kunlun Tech's P/S

Shares in Kunlun Tech have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Kunlun Tech, this doesn't appear to be impacting the P/S in the slightest. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You need to take note of risks, for example - Kunlun Tech has 3 warning signs (and 1 which is concerning) we think you should know about.

If these risks are making you reconsider your opinion on Kunlun Tech, 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.