The Kexin Development Co.,Ltd,Shanxi (SHSE:600234) share price has done very well over the last month, posting an excellent gain of 28%. Looking back a bit further, it's encouraging to see the stock is up 33% in the last year.

Since its price has surged higher, you could be forgiven for thinking Kexin DevelopmentLtdShanxi is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 25.9x, considering almost half the companies in China's Consumer Durables industry have P/S ratios below 2.1x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for Kexin DevelopmentLtdShanxi

What Does Kexin DevelopmentLtdShanxi's Recent Performance Look Like?

For instance, Kexin DevelopmentLtdShanxi's receding revenue in recent times would have to be some food for thought. 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. However, if this isn't the case, investors might get caught out paying too much for the stock.

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 a frustrating 51% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 84% in total over the last three years. 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 13% 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 Kexin DevelopmentLtdShanxi 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 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. 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.

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. 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.

It is also worth noting that we have found 2 warning signs for Kexin DevelopmentLtdShanxi (1 can't be ignored!) that you need to take into consideration.

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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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.