There's Reason For Concern Over China Zhonghua Geotechnical Engineering Group Co., Ltd.'s (SZSE:002542) Massive 25% Price Jump

Those holding China Zhonghua Geotechnical Engineering Group Co., Ltd. (SZSE:002542) shares would be relieved that the share price has rebounded 25% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Looking back a bit further, it's encouraging to see the stock is up 89% in the last year.

After such a large jump in price, you could be forgiven for thinking China Zhonghua Geotechnical Engineering Group is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 3.5x, considering almost half the companies in China's Construction industry have P/S ratios below 1.5x. 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 China Zhonghua Geotechnical Engineering Group

How Has China Zhonghua Geotechnical Engineering Group Performed Recently?

For instance, China Zhonghua Geotechnical Engineering Group's receding revenue in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. 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 China Zhonghua Geotechnical Engineering Group, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is China Zhonghua Geotechnical Engineering Group's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as China Zhonghua Geotechnical Engineering Group's is when the company's growth is on track to outshine the industry decidedly.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 15%. As a result, revenue from three years ago have also fallen 63% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

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

With this information, we find it concerning that China Zhonghua Geotechnical Engineering Group is trading at a P/S higher than the industry. 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.

The Bottom Line On China Zhonghua Geotechnical Engineering Group's P/S

Shares in China Zhonghua Geotechnical Engineering Group have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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 Zhonghua Geotechnical Engineering Group 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.

We don't want to rain on the parade too much, but we did also find 2 warning signs for China Zhonghua Geotechnical Engineering Group (1 is concerning!) that you need to be mindful of.

If you're unsure about the strength of China Zhonghua Geotechnical Engineering Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.