Despite an already strong run, Kinco Automation (Shanghai) Co.,Ltd (SHSE:688160) shares have been powering on, with a gain of 43% in the last thirty days. Taking a wider view, although not as strong as the last month, the full year gain of 17% is also fairly reasonable.

Since its price has surged higher, Kinco Automation (Shanghai)Ltd's price-to-sales (or "P/S") ratio of 10.3x might make it look like a strong sell right now compared to other companies in the Electronic industry in China, where around half of the companies have P/S ratios below 4.3x and even P/S below 2x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

How Kinco Automation (Shanghai)Ltd Has Been Performing

Revenue has risen at a steady rate over the last year for Kinco Automation (Shanghai)Ltd, which is generally not a bad outcome. Perhaps the market believes the recent revenue performance is strong enough to outperform the industry, which has inflated the P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

Is There Enough Revenue Growth Forecasted For Kinco Automation (Shanghai)Ltd?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Kinco Automation (Shanghai)Ltd's to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 4.6% last year. Although, the latest three year period in total hasn't been as good as it didn't manage to provide any growth at all. Therefore, it's fair to say that revenue growth has been inconsistent recently 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.

With this in mind, we find it worrying that Kinco Automation (Shanghai)Ltd's P/S exceeds that of its industry peers. 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.

The Bottom Line On Kinco Automation (Shanghai)Ltd's P/S

Shares in Kinco Automation (Shanghai)Ltd 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.

The fact that Kinco Automation (Shanghai)Ltd currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. 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 there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

You need to take note of risks, for example - Kinco Automation (Shanghai)Ltd has 3 warning signs (and 2 which are a bit concerning) we think you should know about.

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.