Improved Revenues Required Before Shenzhen Kingdom Sci-Tech Co., Ltd (SHSE:600446) Stock's 36% Jump Looks Justified

Shenzhen Kingdom Sci-Tech Co., Ltd (SHSE:600446) shareholders would be excited to see that the share price has had a great month, posting a 36% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 54%.

Although its price has surged higher, Shenzhen Kingdom Sci-Tech's price-to-sales (or "P/S") ratio of 3.3x might still make it look like a strong buy right now compared to the wider Software industry in China, where around half of the companies have P/S ratios above 8.1x and even P/S above 15x are quite common. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Shenzhen Kingdom Sci-Tech

How Shenzhen Kingdom Sci-Tech Has Been Performing

Shenzhen Kingdom Sci-Tech hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Want the full picture on analyst estimates for the company? Then our free report on Shenzhen Kingdom Sci-Tech will help you uncover what's on the horizon.

Do Revenue Forecasts Match The Low P/S Ratio?

Shenzhen Kingdom Sci-Tech's P/S ratio would be typical for a company that's expected to deliver very poor growth or even falling revenue, and importantly, perform much worse than the industry.

Retrospectively, the last year delivered a frustrating 8.2% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 9.4% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 13% as estimated by the lone analyst watching the company. With the industry predicted to deliver 28% growth, the company is positioned for a weaker revenue result.

With this information, we can see why Shenzhen Kingdom Sci-Tech is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From Shenzhen Kingdom Sci-Tech's P/S?

Shares in Shenzhen Kingdom Sci-Tech have risen appreciably however, its P/S is still subdued. 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.

We've established that Shenzhen Kingdom Sci-Tech maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Shenzhen Kingdom Sci-Tech, and understanding should be part of your investment process.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.