Optimistic Investors Push Zoje Resources Investment Co., Ltd. (SZSE:002021) Shares Up 37% But Growth Is Lacking

Zoje Resources Investment Co., Ltd. (SZSE:002021) shareholders would be excited to see that the share price has had a great month, posting a 37% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 51%.

Although its price has surged higher, there still wouldn't be many who think Zoje Resources Investment's price-to-sales (or "P/S") ratio of 3.2x is worth a mention when the median P/S in China's Machinery industry is similar at about 2.8x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

See our latest analysis for Zoje Resources Investment

What Does Zoje Resources Investment's Recent Performance Look Like?

The recent revenue growth at Zoje Resources Investment would have to be considered satisfactory if not spectacular. One possibility is that the P/S is moderate because investors think this good revenue growth might only be parallel to the broader industry in the near future. Those who are bullish on Zoje Resources Investment will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

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 Zoje Resources Investment's earnings, revenue and cash flow.

Is There Some Revenue Growth Forecasted For Zoje Resources Investment?

The only time you'd be comfortable seeing a P/S like Zoje Resources Investment's is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered a decent 6.9% gain to the company's revenues. Still, lamentably revenue has fallen 2.5% in aggregate from three years ago, which is disappointing. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 23% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's somewhat alarming that Zoje Resources Investment's P/S sits in line with 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. 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 the recent negative growth rates.

What We Can Learn From Zoje Resources Investment's P/S?

Its shares have lifted substantially and now Zoje Resources Investment's P/S is back within range of the industry median. 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 look at Zoje Resources Investment revealed its shrinking revenues over the medium-term haven't impacted the P/S as much as we anticipated, given the industry is set to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. 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.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Zoje Resources Investment with six simple checks on some of these key factors.

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.