Investors Appear Satisfied With Changsha DIALINE New Material Sci.&Tech. Co., Ltd.'s (SZSE:300700) Prospects As Shares Rocket 55%

Changsha DIALINE New Material Sci.&Tech. Co., Ltd. (SZSE:300700) shares have had a really impressive month, gaining 55% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 28% over that time.

Since its price has surged higher, you could be forgiven for thinking Changsha DIALINE New Material Sci.&Tech is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 5.6x, considering almost half the companies in China's Machinery industry have P/S ratios below 2.8x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for Changsha DIALINE New Material Sci.&Tech

What Does Changsha DIALINE New Material Sci.&Tech's P/S Mean For Shareholders?

Changsha DIALINE New Material Sci.&Tech hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Keen to find out how analysts think Changsha DIALINE New Material Sci.&Tech's future stacks up against the industry? In that case, our free report is a great place to start.

What Are Revenue Growth Metrics Telling Us About The High P/S?

The only time you'd be truly comfortable seeing a P/S as steep as Changsha DIALINE New Material Sci.&Tech'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 23%. Even so, admirably revenue has lifted 171% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Turning to the outlook, the next year should generate growth of 137% as estimated by the lone analyst watching the company. That's shaping up to be materially higher than the 23% growth forecast for the broader industry.

In light of this, it's understandable that Changsha DIALINE New Material Sci.&Tech's P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Changsha DIALINE New Material Sci.&Tech's P/S?

The strong share price surge has lead to Changsha DIALINE New Material Sci.&Tech's P/S soaring as well. 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.

As we suspected, our examination of Changsha DIALINE New Material Sci.&Tech's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Changsha DIALINE New Material Sci.&Tech (1 doesn't sit too well with us!) that you should be aware of before investing here.

If these risks are making you reconsider your opinion on Changsha DIALINE New Material Sci.&Tech, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.