What Jinfa Labi Maternity & Baby Articles Co., Ltd's (SZSE:002762) 37% Share Price Gain Is Not Telling You

Jinfa Labi Maternity & Baby Articles Co., Ltd (SZSE:002762) shareholders are no doubt pleased to see that the share price has bounced 37% in the last month, although it is still struggling to make up recently lost ground. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 39% over that time.

Since its price has surged higher, you could be forgiven for thinking Jinfa Labi Maternity & Baby Articles is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 13.2x, considering almost half the companies in China's Luxury industry have P/S ratios below 1.6x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for Jinfa Labi Maternity & Baby Articles

How Jinfa Labi Maternity & Baby Articles Has Been Performing

As an illustration, revenue has deteriorated at Jinfa Labi Maternity & Baby Articles over the last year, which is not ideal at all. One possibility is that the P/S is high because investors think the company will still do 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.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Jinfa Labi Maternity & Baby Articles will help you shine a light on its historical performance.

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

Jinfa Labi Maternity & Baby Articles' P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

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%. As a result, revenue from three years ago have also fallen 37% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 20% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this information, we find it concerning that Jinfa Labi Maternity & Baby Articles is trading at a P/S higher than the industry. 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. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What We Can Learn From Jinfa Labi Maternity & Baby Articles' P/S?

Jinfa Labi Maternity & Baby Articles' P/S has grown nicely over the last month thanks to a handy boost in the share price. 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 Jinfa Labi Maternity & Baby Articles currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. 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. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

Having said that, be aware Jinfa Labi Maternity & Baby Articles is showing 2 warning signs in our investment analysis, and 1 of those is significant.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.