Those holding Shenzhen Kaizhong Precision Technology Co., Ltd. (SZSE:002823) shares would be relieved that the share price has rebounded 29% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

Even after such a large jump in price, it would still be understandable if you think Shenzhen Kaizhong Precision Technology is a stock with good investment prospects with a price-to-sales ratios (or "P/S") of 1x, considering almost half the companies in China's Electrical industry have P/S ratios above 2.3x. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

What Does Shenzhen Kaizhong Precision Technology's P/S Mean For Shareholders?

The revenue growth achieved at Shenzhen Kaizhong Precision Technology over the last year would be more than acceptable for most companies. It might be that many expect the respectable revenue performance to degrade substantially, which has repressed the P/S. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

Do Revenue Forecasts Match The Low P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as low as Shenzhen Kaizhong Precision Technology's is when the company's growth is on track to lag the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 14%. The latest three year period has also seen an excellent 62% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing revenues over that time.

Comparing that to the industry, which is predicted to deliver 22% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this in consideration, it's easy to understand why Shenzhen Kaizhong Precision Technology's P/S falls short of the mark set by its industry peers. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Key Takeaway

Shenzhen Kaizhong Precision Technology's stock price has surged recently, but its but its P/S still remains modest. 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.

In line with expectations, Shenzhen Kaizhong Precision Technology maintains its low P/S on the weakness of its recent three-year growth being lower than the wider industry forecast. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

It is also worth noting that we have found 3 warning signs for Shenzhen Kaizhong Precision Technology (2 can't be ignored!) that you need to take into consideration.

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.