Anhui Chaoyue Environmental Protection Technology Co., Ltd.'s (SZSE:301049) 48% Price Boost Is Out Of Tune With Revenues

Anhui Chaoyue Environmental Protection Technology Co., Ltd. (SZSE:301049) shares have continued their recent momentum with a 48% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 28%.

Since its price has surged higher, when almost half of the companies in China's Commercial Services industry have price-to-sales ratios (or "P/S") below 2.7x, you may consider Anhui Chaoyue Environmental Protection Technology as a stock not worth researching with its 9.6x 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 so lofty.

View our latest analysis for Anhui Chaoyue Environmental Protection Technology

How Has Anhui Chaoyue Environmental Protection Technology Performed Recently?

Recent times have been quite advantageous for Anhui Chaoyue Environmental Protection Technology as its revenue has been rising very briskly. The P/S ratio is probably high because investors think this strong revenue growth will be enough to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Although there are no analyst estimates available for Anhui Chaoyue Environmental Protection Technology, 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?

The only time you'd be truly comfortable seeing a P/S as steep as Anhui Chaoyue Environmental Protection Technology's is when the company's growth is on track to outshine the industry decidedly.

If we review the last year of revenue growth, the company posted a terrific increase of 35%. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 3.6% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 28% shows it's an unpleasant look.

With this in mind, we find it worrying that Anhui Chaoyue Environmental Protection Technology's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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 Key Takeaway

Shares in Anhui Chaoyue Environmental Protection Technology 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.

Our examination of Anhui Chaoyue Environmental Protection Technology revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. 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 Anhui Chaoyue Environmental Protection Technology that you need to be mindful of.

If you're unsure about the strength of Anhui Chaoyue Environmental Protection Technology'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.