Despite an already strong run, Kexin Development Co.,Ltd,Shanxi (SHSE:600234) shares have been powering on, with a gain of 38% in the last thirty days. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 24% over that time.

After such a large jump in price, given around half the companies in China's Consumer Durables industry have price-to-sales ratios (or "P/S") below 2.4x, you may consider Kexin DevelopmentLtdShanxi as a stock to avoid entirely with its 10.4x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

What Does Kexin DevelopmentLtdShanxi's P/S Mean For Shareholders?

With revenue growth that's exceedingly strong of late, Kexin DevelopmentLtdShanxi has been doing very well. The P/S ratio is probably high because investors think this strong revenue growth will be enough to outperform the broader industry in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

Do Revenue Forecasts Match The High P/S Ratio?

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

Retrospectively, the last year delivered an exceptional 56% gain to the company's top line. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 86% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 10% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Kexin DevelopmentLtdShanxi'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 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 Bottom Line On Kexin DevelopmentLtdShanxi's P/S

Kexin DevelopmentLtdShanxi's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

Our examination of Kexin DevelopmentLtdShanxi revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Kexin DevelopmentLtdShanxi that you should be aware of.

If you're unsure about the strength of Kexin DevelopmentLtdShanxi'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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