There's Reason For Concern Over Shanghai Kaytune Industrial Co.,Ltd's (SZSE:301001) Massive 26% Price Jump

Despite an already strong run, Shanghai Kaytune Industrial Co.,Ltd (SZSE:301001) shares have been powering on, with a gain of 26% in the last thirty days. Unfortunately, despite the strong performance over the last month, the full year gain of 2.8% isn't as attractive.

Following the firm bounce in price, when almost half of the companies in China's Multiline Retail industry have price-to-sales ratios (or "P/S") below 2x, you may consider Shanghai Kaytune IndustrialLtd as a stock not worth researching with its 4.8x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for Shanghai Kaytune IndustrialLtd

What Does Shanghai Kaytune IndustrialLtd's Recent Performance Look Like?

For example, consider that Shanghai Kaytune IndustrialLtd's financial performance has been poor lately as its revenue has been in decline. 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.

Although there are no analyst estimates available for Shanghai Kaytune IndustrialLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Shanghai Kaytune IndustrialLtd?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Shanghai Kaytune IndustrialLtd's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 33% decrease to the company's top line. As a result, revenue from three years ago have also fallen 43% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 14% shows it's an unpleasant look.

With this information, we find it concerning that Shanghai Kaytune IndustrialLtd 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. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Final Word

Shares in Shanghai Kaytune IndustrialLtd have seen a strong upwards swing lately, which has really helped boost its P/S figure. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Shanghai Kaytune IndustrialLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Shanghai Kaytune IndustrialLtd (at least 2 which can't be ignored), and understanding these should be part of your investment process.

If you're unsure about the strength of Shanghai Kaytune IndustrialLtd'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.