Tianjin Guoan Mengguli New Materials Science & Technology Co., Ltd.'s (SZSE:301487) 28% Price Boost Is Out Of Tune With Revenues

Those holding Tianjin Guoan Mengguli New Materials Science & Technology Co., Ltd. (SZSE:301487) shares would be relieved that the share price has rebounded 28% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

After such a large jump in price, you could be forgiven for thinking Tianjin Guoan Mengguli New Materials Science & Technology is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 6.3x, considering almost half the companies in China's Electrical industry have P/S ratios below 2.1x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

View our latest analysis for Tianjin Guoan Mengguli New Materials Science & Technology

What Does Tianjin Guoan Mengguli New Materials Science & Technology's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Tianjin Guoan Mengguli New Materials Science & Technology over the last year, which is not ideal at all. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Tianjin Guoan Mengguli New Materials Science & Technology's earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as steep as Tianjin Guoan Mengguli New Materials Science & Technology's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered a frustrating 29% decrease to the company's top line. However, a few very strong years before that means that it was still able to grow revenue by an impressive 49% in total over the last three years. 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.

Comparing that to the industry, which is predicted to deliver 26% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

In light of this, it's alarming that Tianjin Guoan Mengguli New Materials Science & Technology's P/S sits above the majority of other companies. 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.

What Does Tianjin Guoan Mengguli New Materials Science & Technology's P/S Mean For Investors?

Shares in Tianjin Guoan Mengguli New Materials Science & Technology have seen a strong upwards swing lately, which has really helped boost its P/S figure. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

The fact that Tianjin Guoan Mengguli New Materials Science & Technology 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. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. 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.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Tianjin Guoan Mengguli New Materials Science & Technology with six simple checks on some of these key factors.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.