ZheJiang KangLongDa Special Protection Technology Co., Ltd (SHSE:603665) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 16% over that time.

Following the firm bounce in price, given close to half the companies operating in China's Luxury industry have price-to-sales ratios (or "P/S") below 2x, you may consider ZheJiang KangLongDa Special Protection Technology as a stock to potentially avoid with its 2.8x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for ZheJiang KangLongDa Special Protection Technology

What Does ZheJiang KangLongDa Special Protection Technology's P/S Mean For Shareholders?

With revenue growth that's exceedingly strong of late, ZheJiang KangLongDa Special Protection Technology 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Although there are no analyst estimates available for ZheJiang KangLongDa Special Protection Technology, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For ZheJiang KangLongDa Special Protection Technology?

The only time you'd be truly comfortable seeing a P/S as high as ZheJiang KangLongDa Special Protection Technology's is when the company's growth is on track to outshine the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 53%. Pleasingly, revenue has also lifted 75% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 20% growth in the next 12 months, the company's momentum is pretty similar based on recent medium-term annualised revenue results.

With this information, we find it interesting that ZheJiang KangLongDa Special Protection Technology is trading at a high P/S compared to the industry. Apparently many investors in the company are more bullish than recent times would indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as a continuation of recent revenue trends would weigh down the share price eventually.

What Does ZheJiang KangLongDa Special Protection Technology's P/S Mean For Investors?

The large bounce in ZheJiang KangLongDa Special Protection Technology's shares has lifted the company's P/S handsomely. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our look into ZheJiang KangLongDa Special Protection Technology has shown that it currently trades on a higher than expected P/S since its recent three-year growth is only in line with the wider industry forecast. Right now we are uncomfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

And what about other risks? Every company has them, and we've spotted 3 warning signs for ZheJiang KangLongDa Special Protection Technology (of which 1 is concerning!) you should know about.

If these risks are making you reconsider your opinion on ZheJiang KangLongDa Special Protection Technology, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.