Nanjing Canatal Data-Centre Environmental Tech Co., Ltd's (SHSE:603912) 38% Share Price Surge Not Quite Adding Up

Nanjing Canatal Data-Centre Environmental Tech Co., Ltd (SHSE:603912) shares have continued their recent momentum with a 38% gain in the last month alone. Notwithstanding the latest gain, the annual share price return of 9.4% isn't as impressive.

After such a large jump in price, given around half the companies in China's Machinery industry have price-to-sales ratios (or "P/S") below 3.2x, you may consider Nanjing Canatal Data-Centre Environmental Tech as a stock to avoid entirely with its 7.3x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Nanjing Canatal Data-Centre Environmental Tech

How Nanjing Canatal Data-Centre Environmental Tech Has Been Performing

Revenue has risen firmly for Nanjing Canatal Data-Centre Environmental Tech recently, which is pleasing to see. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Nanjing Canatal Data-Centre Environmental Tech will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For Nanjing Canatal Data-Centre Environmental Tech?

Nanjing Canatal Data-Centre Environmental Tech's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Taking a look back first, we see that the company grew revenue by an impressive 18% last year. Still, revenue has barely risen at all from three years ago in total, which is not ideal. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

This is in contrast to the rest of the industry, which is expected to grow by 22% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in mind, we find it worrying that Nanjing Canatal Data-Centre Environmental Tech'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 good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Bottom Line On Nanjing Canatal Data-Centre Environmental Tech's P/S

Nanjing Canatal Data-Centre Environmental Tech's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

The fact that Nanjing Canatal Data-Centre Environmental Tech currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

You need to take note of risks, for example - Nanjing Canatal Data-Centre Environmental Tech has 3 warning signs (and 2 which are significant) we think you should know about.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.