Revenues Not Telling The Story For Sinkang Industries Co., Ltd. (TWSE:2032) After Shares Rise 51%

Sinkang Industries Co., Ltd. (TWSE:2032) shareholders would be excited to see that the share price has had a great month, posting a 51% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 26% in the last year.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about Sinkang Industries' P/S ratio of 0.9x, since the median price-to-sales (or "P/S") ratio for the Metals and Mining industry in Taiwan is also close to 1x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for Sinkang Industries

What Does Sinkang Industries' P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Sinkang Industries over the last year, which is not ideal at all. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. If not, then existing shareholders may be a little nervous about the viability of the share price.

Although there are no analyst estimates available for Sinkang Industries, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Sinkang Industries' Revenue Growth Trending?

In order to justify its P/S ratio, Sinkang Industries would need to produce growth that's similar to the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 1.3%. This means it has also seen a slide in revenue over the longer-term as revenue is down 18% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 2.6% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that Sinkang Industries is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. 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 the recent negative growth rates.

The Bottom Line On Sinkang Industries' P/S

Its shares have lifted substantially and now Sinkang Industries' P/S is back within range of the industry median. 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.

We find it unexpected that Sinkang Industries trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Sinkang Industries (at least 1 which is a bit concerning), and understanding them should be part of your investment process.

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.