Optimistic Investors Push China National Complete Plant Import & Export Corporation Limited (SZSE:000151) Shares Up 46% But Growth Is Lacking

China National Complete Plant Import & Export Corporation Limited (SZSE:000151) shares have continued their recent momentum with a 46% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 50%.

Following the firm bounce in price, you could be forgiven for thinking China National Complete Plant Import & Export is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 3.3x, considering almost half the companies in China's Trade Distributors industry have P/S ratios below 0.8x. 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 China National Complete Plant Import & Export

How China National Complete Plant Import & Export Has Been Performing

For example, consider that China National Complete Plant Import & Export's financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. However, if this isn't the case, investors might get caught out paying too much for the stock.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on China National Complete Plant Import & Export's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For China National Complete Plant Import & Export?

China National Complete Plant Import & Export'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, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 60%. This means it has also seen a slide in revenue over the longer-term as revenue is down 28% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 17% shows it's an unpleasant look.

In light of this, it's alarming that China National Complete Plant Import & Export's P/S sits above the majority of other companies. 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 heavily on the share price eventually.

What We Can Learn From China National Complete Plant Import & Export's P/S?

The strong share price surge has lead to China National Complete Plant Import & Export's P/S soaring as well. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that China National Complete Plant Import & Export currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. 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. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You always need to take note of risks, for example - China National Complete Plant Import & Export has 1 warning sign we think you should be aware of.

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.