Kinco Automation (Shanghai) Co.,Ltd's (SHSE:688160) 30% Share Price Surge Not Quite Adding Up

Despite an already strong run, Kinco Automation (Shanghai) Co.,Ltd (SHSE:688160) shares have been powering on, with a gain of 30% in the last thirty days. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 11% over that time.

After such a large jump in price, Kinco Automation (Shanghai)Ltd's price-to-sales (or "P/S") ratio of 8.8x might make it look like a strong sell right now compared to other companies in the Electronic industry in China, where around half of the companies have P/S ratios below 4.4x and even P/S below 2x are quite common. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Kinco Automation (Shanghai)Ltd

How Kinco Automation (Shanghai)Ltd Has Been Performing

The recent revenue growth at Kinco Automation (Shanghai)Ltd would have to be considered satisfactory if not spectacular. One possibility is that the P/S ratio is high because investors think this good revenue growth will be enough to outperform the broader industry in the near future. 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 Kinco Automation (Shanghai)Ltd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Kinco Automation (Shanghai)Ltd's Revenue Growth Trending?

In order to justify its P/S ratio, Kinco Automation (Shanghai)Ltd would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a decent 4.6% gain to the company's revenues. However, due to its less than impressive performance prior to this period, revenue growth is practically non-existent over the last three years overall. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 27% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this information, we find it concerning that Kinco Automation (Shanghai)Ltd is trading at a P/S higher than the industry. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Key Takeaway

The strong share price surge has lead to Kinco Automation (Shanghai)Ltd's P/S soaring as well. 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.

Our examination of Kinco Automation (Shanghai)Ltd revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

You need to take note of risks, for example - Kinco Automation (Shanghai)Ltd has 4 warning signs (and 1 which is potentially serious) we think you should know about.

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.