XinJiang GuoTong Pipeline CO.,Ltd (SZSE:002205) Stock Rockets 31% As Investors Are Less Pessimistic Than Expected

Despite an already strong run, XinJiang GuoTong Pipeline CO.,Ltd (SZSE:002205) shares have been powering on, with a gain of 31% in the last thirty days. Unfortunately, despite the strong performance over the last month, the full year gain of 7.9% isn't as attractive.

Following the firm bounce in price, when almost half of the companies in China's Building industry have price-to-sales ratios (or "P/S") below 1.9x, you may consider XinJiang GuoTong PipelineLtd as a stock not worth researching with its 4.1x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for XinJiang GuoTong PipelineLtd

What Does XinJiang GuoTong PipelineLtd's P/S Mean For Shareholders?

For example, consider that XinJiang GuoTong PipelineLtd's financial performance has been pretty ordinary lately as revenue growth is non-existent. It might be that many are expecting an improvement to the uninspiring revenue performance over the coming period, which has kept the P/S from collapsing. 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 XinJiang GuoTong PipelineLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is XinJiang GuoTong PipelineLtd's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as XinJiang GuoTong PipelineLtd's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered virtually the same number to the company's top line as the year before. This isn't what shareholders were looking for as it means they've been left with a 50% decline in revenue over the last three years in total. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 21% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's alarming that XinJiang GuoTong PipelineLtd'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.

The Key Takeaway

Shares in XinJiang GuoTong PipelineLtd have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

We've established that XinJiang GuoTong PipelineLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for XinJiang GuoTong PipelineLtd that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.