What Jiangsu Allfavor Intelligent Circuits Technology CO.,Ltd's (SZSE:300964) 28% Share Price Gain Is Not Telling You

Jiangsu Allfavor Intelligent Circuits Technology CO.,Ltd (SZSE:300964) shareholders are no doubt pleased to see that the share price has bounced 28% in the last month, although it is still struggling to make up recently lost ground. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 16% in the last twelve months.

After such a large jump in price, you could be forgiven for thinking Jiangsu Allfavor Intelligent Circuits TechnologyLtd is a stock not worth researching with a price-to-sales ratios (or "P/S") of 5.3x, considering almost half the companies in China's Electronic industry have P/S ratios below 3.6x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

See our latest analysis for Jiangsu Allfavor Intelligent Circuits TechnologyLtd

What Does Jiangsu Allfavor Intelligent Circuits TechnologyLtd's Recent Performance Look Like?

For instance, Jiangsu Allfavor Intelligent Circuits TechnologyLtd's receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Jiangsu Allfavor Intelligent Circuits TechnologyLtd's earnings, revenue and cash flow.

How Is Jiangsu Allfavor Intelligent Circuits TechnologyLtd's Revenue Growth Trending?

Jiangsu Allfavor Intelligent Circuits TechnologyLtd's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

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 15%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 16% overall rise in revenue. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 26% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Jiangsu Allfavor Intelligent Circuits TechnologyLtd is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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 Final Word

The large bounce in Jiangsu Allfavor Intelligent Circuits TechnologyLtd's shares has lifted the company's P/S handsomely. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Jiangsu Allfavor Intelligent Circuits TechnologyLtd 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 the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Jiangsu Allfavor Intelligent Circuits TechnologyLtd (of which 2 are a bit unpleasant!) you should know about.

If you're unsure about the strength of Jiangsu Allfavor Intelligent Circuits TechnologyLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.