What Jiangsu Allfavor Intelligent Circuits Technology CO.,Ltd's (SZSE:300964) 48% Share Price Gain Is Not Telling You

The Jiangsu Allfavor Intelligent Circuits Technology CO.,Ltd (SZSE:300964) share price has done very well over the last month, posting an excellent gain of 48%. Notwithstanding the latest gain, the annual share price return of 4.6% isn't as impressive.

Since its price has surged higher, Jiangsu Allfavor Intelligent Circuits TechnologyLtd may be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 6.8x, since almost half of all companies in the Electronic industry in China have P/S ratios under 4x and even P/S lower than 2x are not unusual. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Jiangsu Allfavor Intelligent Circuits TechnologyLtd

How Jiangsu Allfavor Intelligent Circuits TechnologyLtd Has Been Performing

As an illustration, revenue has deteriorated at Jiangsu Allfavor Intelligent Circuits TechnologyLtd over the last year, which is not ideal at all. 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. However, if this isn't the case, investors might get caught out paying too much for the stock.

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.

Is There Enough Revenue Growth Forecasted For Jiangsu Allfavor Intelligent Circuits TechnologyLtd?

In order to justify its P/S ratio, Jiangsu Allfavor Intelligent Circuits TechnologyLtd would need to produce outstanding growth that's well in excess of 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 2.1%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 13% overall rise in revenue. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 26% shows it's noticeably less attractive.

In light of this, it's alarming that Jiangsu Allfavor Intelligent Circuits TechnologyLtd's P/S sits above the majority of other companies. 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.

What We Can Learn From Jiangsu Allfavor Intelligent Circuits TechnologyLtd's P/S?

Jiangsu Allfavor Intelligent Circuits TechnologyLtd's P/S has grown nicely over the last month thanks to a handy boost in the share price. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

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. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

You should always think about risks. Case in point, we've spotted 4 warning signs for Jiangsu Allfavor Intelligent Circuits TechnologyLtd you should be aware of, and 2 of them are significant.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.