Keystone Technology Co.,Ltd. (SHSE:605588) Surges 25% Yet Its Low P/S Is No Reason For Excitement

Keystone Technology Co.,Ltd. (SHSE:605588) shareholders have had their patience rewarded with a 25% share price jump in the last month. Taking a wider view, although not as strong as the last month, the full year gain of 20% is also fairly reasonable.

In spite of the firm bounce in price, Keystone TechnologyLtd may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 3.2x, since almost half of all companies in the Electronic industry in China have P/S ratios greater than 4.4x and even P/S higher than 9x are not unusual. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

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See our latest analysis for Keystone TechnologyLtd

How Keystone TechnologyLtd Has Been Performing

Recent times have been quite advantageous for Keystone TechnologyLtd as its revenue has been rising very briskly. Perhaps the market is expecting future revenue performance to dwindle, which has kept the P/S suppressed. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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

How Is Keystone TechnologyLtd's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as low as Keystone TechnologyLtd's is when the company's growth is on track to lag the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 38%. Still, revenue has fallen 13% in total from three years ago, which is quite disappointing. 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 26% 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. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

What We Can Learn From Keystone TechnologyLtd's P/S?

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.

As we suspected, our examination of Keystone TechnologyLtd revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. If recent medium-term revenue trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

There are also other vital risk factors to consider and we've discovered 4 warning signs for Keystone TechnologyLtd (3 shouldn't be ignored!) that you should be aware of before investing here.

If these risks are making you reconsider your opinion on Keystone TechnologyLtd, 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.