Kaiyuan Education Technology Group Co., Ltd.'s (SZSE:300338) Popularity With Investors Under Threat As Stock Sinks 26%

Kaiyuan Education Technology Group Co., Ltd. (SZSE:300338) shares have retraced a considerable 26% in the last month, reversing a fair amount of their solid recent performance. Longer-term shareholders would now have taken a real hit with the stock declining 4.3% in the last year.

In spite of the heavy fall in price, you could still be forgiven for thinking Kaiyuan Education Technology Group is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 7.5x, considering almost half the companies in China's Electronic industry have P/S ratios below 3.7x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

See our latest analysis for Kaiyuan Education Technology Group

How Has Kaiyuan Education Technology Group Performed Recently?

As an illustration, revenue has deteriorated at Kaiyuan Education Technology Group over the last year, which is not ideal at all. 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. If not, then existing shareholders may be quite nervous about the viability of the share price.

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

Is There Enough Revenue Growth Forecasted For Kaiyuan Education Technology Group?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Kaiyuan Education Technology Group's to be considered reasonable.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 61%. As a result, revenue from three years ago have also fallen 81% 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 26% shows it's an unpleasant look.

With this information, we find it concerning that Kaiyuan Education Technology Group is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Bottom Line On Kaiyuan Education Technology Group's P/S

Even after such a strong price drop, Kaiyuan Education Technology Group's P/S still exceeds the industry median significantly. 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 Kaiyuan Education Technology Group currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

It is also worth noting that we have found 3 warning signs for Kaiyuan Education Technology Group that you need to take into consideration.

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.