Why Investors Shouldn't Be Surprised By Long Young Electronic (Kunshan) Co., Ltd.'s (SZSE:301389) 25% Share Price Surge

Long Young Electronic (Kunshan) Co., Ltd. (SZSE:301389) shares have continued their recent momentum with a 25% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 79% in the last year.

After such a large jump in price, Long Young Electronic (Kunshan) may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 21.7x, when you consider almost half of the companies in the Electronic industry in China have P/S ratios under 4.4x and even P/S lower than 2x aren't out of the ordinary. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Long Young Electronic (Kunshan)

How Long Young Electronic (Kunshan) Has Been Performing

Recent times haven't been great for Long Young Electronic (Kunshan) as its revenue has been rising slower than most other companies. One possibility is that the P/S ratio is high because investors think this lacklustre revenue performance will improve markedly. If not, then existing shareholders may be very nervous about the viability of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Long Young Electronic (Kunshan).

Is There Enough Revenue Growth Forecasted For Long Young Electronic (Kunshan)?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Long Young Electronic (Kunshan)'s to be considered reasonable.

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. Whilst it's an improvement, it wasn't enough to get the company out of the hole it was in, with revenue down 36% overall from three years ago. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Shifting to the future, estimates from the only analyst covering the company suggest revenue should grow by 211% over the next year. That's shaping up to be materially higher than the 25% growth forecast for the broader industry.

In light of this, it's understandable that Long Young Electronic (Kunshan)'s P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What Does Long Young Electronic (Kunshan)'s P/S Mean For Investors?

Shares in Long Young Electronic (Kunshan) have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

We've established that Long Young Electronic (Kunshan) maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Electronic industry, as expected. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless these conditions change, they will continue to provide strong support to the share price.

Having said that, be aware Long Young Electronic (Kunshan) is showing 3 warning signs in our investment analysis, and 2 of those are potentially serious.

If these risks are making you reconsider your opinion on Long Young Electronic (Kunshan), 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.