Shanghai Kaytune Industrial Co.,Ltd (SZSE:301001) shares have continued their recent momentum with a 34% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 29% in the last year.

Following the firm bounce in price, you could be forgiven for thinking Shanghai Kaytune IndustrialLtd is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 5.7x, considering almost half the companies in China's Multiline Retail industry have P/S ratios below 1.8x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

What Does Shanghai Kaytune IndustrialLtd's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Shanghai Kaytune IndustrialLtd over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Is There Enough Revenue Growth Forecasted For Shanghai Kaytune IndustrialLtd?

In order to justify its P/S ratio, Shanghai Kaytune IndustrialLtd would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a frustrating 33% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 43% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 14% 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 Shanghai Kaytune IndustrialLtd is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very 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 Key Takeaway

Shares in Shanghai Kaytune IndustrialLtd have seen a strong upwards swing lately, which has really helped boost its P/S figure. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Shanghai Kaytune IndustrialLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

Before you take the next step, you should know about the 3 warning signs for Shanghai Kaytune IndustrialLtd (2 are a bit unpleasant!) that we have uncovered.

If you're unsure about the strength of Shanghai Kaytune IndustrialLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.