Despite an already strong run, Kinco Automation (Shanghai) Co.,Ltd (SHSE:688160) shares have been powering on, with a gain of 31% in the last thirty days. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 14% in the last twelve months.

After such a large jump in price, Kinco Automation (Shanghai)Ltd may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 8.6x, when you consider almost half of the companies in the Electronic industry in China have P/S ratios under 4.5x 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.

What Does Kinco Automation (Shanghai)Ltd's P/S Mean For Shareholders?

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. If not, then existing shareholders may be a little nervous about the viability of the share price.

How Is Kinco Automation (Shanghai)Ltd's Revenue Growth Trending?

In order to justify its P/S ratio, Kinco Automation (Shanghai)Ltd would need to produce outstanding growth that's well in excess of the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 4.6% last year. Still, revenue has barely risen at all in aggregate from three years ago, which is not ideal. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 27% 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. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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 Final Word

Kinco Automation (Shanghai)Ltd's P/S has grown nicely over the last month thanks to a handy boost in the share price. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the 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.

Having said that, be aware Kinco Automation (Shanghai)Ltd is showing 4 warning signs in our investment analysis, and 1 of those can't be ignored.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.