Qinchuan Machine Tool & Tool Group Share Co., Ltd.'s (SZSE:000837) 26% Price Boost Is Out Of Tune With Revenues - Simply Wall St News

Stock Analysis

Qinchuan Machine Tool & Tool Group Share Co., Ltd. (SZSE:000837) shares have continued their recent momentum with a 26% gain in the last month alone. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 7.9% in the last twelve months.

Although its price has surged higher, you could still be forgiven for feeling indifferent about Qinchuan Machine Tool & Tool Group Share's P/S ratio of 2.7x, since the median price-to-sales (or "P/S") ratio for the Machinery industry in China is also close to 3.2x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Check out our latest analysis for Qinchuan Machine Tool & Tool Group Share

It looks like revenue growth has deserted Qinchuan Machine Tool & Tool Group Share recently, which is not something to boast about. One possibility is that the P/S is moderate because investors think this benign revenue growth rate might not be enough to outperform the broader industry in the near future. Those who are bullish on Qinchuan Machine Tool & Tool Group Share will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

The only time you'd be comfortable seeing a P/S like Qinchuan Machine Tool & Tool Group Share's is when the company's growth is tracking the industry closely.

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. This isn't what shareholders were looking for as it means they've been left with a 27% decline in revenue over the last three years in total. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 25% 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 Qinchuan Machine Tool & Tool Group Share is trading at a fairly similar P/S compared to 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. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

Its shares have lifted substantially and now Qinchuan Machine Tool & Tool Group Share's P/S is back within range of the industry median. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We find it unexpected that Qinchuan Machine Tool & Tool Group Share trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. 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.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Qinchuan Machine Tool & Tool Group Share that you need to be mindful of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

Discover if Qinchuan Machine Tool & Tool Group Share might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.

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Qinchuan Machine Tool & Tool Group Share Co., Ltd.