SinoDaan Co., Ltd. (SZSE:300635) Stock Rockets 26% As Investors Are Less Pessimistic Than Expected

The SinoDaan Co., Ltd. (SZSE:300635) share price has done very well over the last month, posting an excellent gain of 26%. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 24% in the last twelve months.

After such a large jump in price, you could be forgiven for thinking SinoDaan is a stock not worth researching with a price-to-sales ratios (or "P/S") of 1.8x, considering almost half the companies in China's Construction industry have P/S ratios below 1x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for SinoDaan

How SinoDaan Has Been Performing

SinoDaan has been doing a good job lately as it's been growing revenue at a solid pace. 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. If not, then existing shareholders may be a little nervous about the viability of the share price.

Although there are no analyst estimates available for SinoDaan, 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?

There's an inherent assumption that a company should outperform the industry for P/S ratios like SinoDaan's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 28% gain to the company's top line. As a result, it also grew revenue by 19% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Comparing that to the industry, which is predicted to deliver 15% 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 SinoDaan'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. 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 recent growth rates.

The Final Word

The large bounce in SinoDaan's shares has lifted the company's P/S handsomely. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

The fact that SinoDaan currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. 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.

We don't want to rain on the parade too much, but we did also find 3 warning signs for SinoDaan (2 are a bit concerning!) that you need to be mindful 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.