Zhejiang Youpon Integrated Ceiling Co.,Ltd. (SZSE:002718) Stock Rockets 31% As Investors Are Less Pessimistic Than Expected

Despite an already strong run, Zhejiang Youpon Integrated Ceiling Co.,Ltd. (SZSE:002718) shares have been powering on, with a gain of 31% in the last thirty days. Looking further back, the 13% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

After such a large jump in price, given close to half the companies operating in China's Consumer Durables industry have price-to-sales ratios (or "P/S") below 2.1x, you may consider Zhejiang Youpon Integrated CeilingLtd as a stock to potentially avoid with its 2.9x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

Check out our latest analysis for Zhejiang Youpon Integrated CeilingLtd

What Does Zhejiang Youpon Integrated CeilingLtd's P/S Mean For Shareholders?

For instance, Zhejiang Youpon Integrated CeilingLtd's receding revenue in recent times would have to be some food for thought. 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. However, if this isn't the case, investors might get caught out paying too much for the stock.

Although there are no analyst estimates available for Zhejiang Youpon Integrated CeilingLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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

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

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 20%. This means it has also seen a slide in revenue over the longer-term as revenue is down 21% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 11% shows it's an unpleasant look.

In light of this, it's alarming that Zhejiang Youpon Integrated CeilingLtd'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 We Can Learn From Zhejiang Youpon Integrated CeilingLtd's P/S?

The large bounce in Zhejiang Youpon Integrated CeilingLtd's shares has lifted the company's P/S handsomely. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Zhejiang Youpon Integrated CeilingLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. 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.

Before you take the next step, you should know about the 3 warning signs for Zhejiang Youpon Integrated CeilingLtd that we have uncovered.

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.