Pinning Down JL Mag Rare-Earth Co., Ltd.'s (SZSE:300748) P/S Is Difficult Right Now

When close to half the companies in the Electrical industry in China have price-to-sales ratios (or "P/S") below 2.3x, you may consider JL Mag Rare-Earth Co., Ltd. (SZSE:300748) as a stock to potentially avoid with its 4.1x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

View our latest analysis for JL Mag Rare-Earth

How Has JL Mag Rare-Earth Performed Recently?

While the industry has experienced revenue growth lately, JL Mag Rare-Earth's revenue has gone into reverse gear, which is not great. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on JL Mag Rare-Earth.

Is There Enough Revenue Growth Forecasted For JL Mag Rare-Earth?

In order to justify its P/S ratio, JL Mag Rare-Earth would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered a frustrating 5.0% decrease to the company's top line. Even so, admirably revenue has lifted 79% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 16% per annum as estimated by the eleven analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 16% per year, which is not materially different.

With this in consideration, we find it intriguing that JL Mag Rare-Earth's P/S is higher than its industry peers. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

The Final Word

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.

Analysts are forecasting JL Mag Rare-Earth's revenues to only grow on par with the rest of the industry, which has lead to the high P/S ratio being unexpected. The fact that the revenue figures aren't setting the world alight has us doubtful that the company's elevated P/S can be sustainable for the long term. A positive change is needed in order to justify the current price-to-sales ratio.

Before you settle on your opinion, we've discovered 5 warning signs for JL Mag Rare-Earth (1 is concerning!) that you should be aware of.

If these risks are making you reconsider your opinion on JL Mag Rare-Earth, 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.