Nanjing Canatal Data-Centre Environmental Tech Co., Ltd's (SHSE:603912) 28% Share Price Surge Not Quite Adding Up

Nanjing Canatal Data-Centre Environmental Tech Co., Ltd (SHSE:603912) shareholders have had their patience rewarded with a 28% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 30% in the last year.

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 3.4x, you may consider Nanjing Canatal Data-Centre Environmental Tech as a stock to avoid entirely with its 7.9x 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.

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

How Has Nanjing Canatal Data-Centre Environmental Tech Performed Recently?

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.

Although there are no analyst estimates available for Nanjing Canatal Data-Centre Environmental Tech, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Nanjing Canatal Data-Centre Environmental Tech would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered an exceptional 18% gain to the company's top line. Still, revenue has barely risen at all from three years ago in total, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Comparing that to the industry, which is predicted to deliver 23% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

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. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What We Can Learn From 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. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of Nanjing Canatal Data-Centre Environmental Tech revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

Before you take the next step, you should know about the 4 warning signs for Nanjing Canatal Data-Centre Environmental Tech (3 are concerning!) that we have uncovered.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.