Keystone Technology Co.,Ltd. (SHSE:605588) Shares Fly 37% But Investors Aren't Buying For Growth

Keystone Technology Co.,Ltd. (SHSE:605588) shares have had a really impressive month, gaining 37% after a shaky period beforehand. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 8.9% in the last twelve months.

Even after such a large jump in price, Keystone TechnologyLtd may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 3.1x, since almost half of all companies in the Electronic industry in China have P/S ratios greater than 4.1x and even P/S higher than 8x are not unusual. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Keystone TechnologyLtd

How Has Keystone TechnologyLtd Performed Recently?

Revenue has risen firmly for Keystone TechnologyLtd recently, which is pleasing to see. It might be that many expect the respectable revenue performance to degrade substantially, which has repressed the P/S. If you 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.

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

Do Revenue Forecasts Match The Low P/S Ratio?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Keystone TechnologyLtd's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 25% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 19% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 27% shows it's an unpleasant look.

In light of this, it's understandable that Keystone TechnologyLtd's P/S would sit below the majority of other companies. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

What Does Keystone TechnologyLtd's P/S Mean For Investors?

The latest share price surge wasn't enough to lift Keystone TechnologyLtd's P/S close to the industry median. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Keystone TechnologyLtd confirms that the company's shrinking revenue over the past medium-term is a key factor in its low price-to-sales ratio, given the industry is projected to grow. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Before you take the next step, you should know about the 3 warning signs for Keystone TechnologyLtd (2 are concerning!) that we have uncovered.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.