Why Investors Shouldn't Be Surprised By Zhejiang Zhongjian Technology Co.,Ltd's (SZSE:002779) 41% Share Price Surge

Despite an already strong run, Zhejiang Zhongjian Technology Co.,Ltd (SZSE:002779) shares have been powering on, with a gain of 41% in the last thirty days. The annual gain comes to 192% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, when almost half of the companies in China's Consumer Durables industry have price-to-sales ratios (or "P/S") below 2.1x, you may consider Zhejiang Zhongjian TechnologyLtd as a stock not worth researching with its 10.1x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for Zhejiang Zhongjian TechnologyLtd

What Does Zhejiang Zhongjian TechnologyLtd's Recent Performance Look Like?

Zhejiang Zhongjian TechnologyLtd certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. It seems that many are expecting the strong revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. 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 Zhejiang Zhongjian TechnologyLtd's 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 far outperform the industry for P/S ratios like Zhejiang Zhongjian TechnologyLtd's to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 35%. Pleasingly, revenue has also lifted 66% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

When compared to the industry's one-year growth forecast of 10%, the most recent medium-term revenue trajectory is noticeably more alluring

In light of this, it's understandable that Zhejiang Zhongjian TechnologyLtd's P/S sits above the majority of other companies. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

What Does Zhejiang Zhongjian TechnologyLtd's P/S Mean For Investors?

The strong share price surge has lead to Zhejiang Zhongjian TechnologyLtd's P/S soaring as well. 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.

As we suspected, our examination of Zhejiang Zhongjian TechnologyLtd revealed its three-year revenue trends are contributing to its high P/S, given they look better than current industry expectations. At this stage investors feel the potential continued revenue growth in the future is great enough to warrant an inflated P/S. Barring any significant changes to the company's ability to make money, the share price should continue to be propped up.

Having said that, be aware Zhejiang Zhongjian TechnologyLtd is showing 1 warning sign in our investment analysis, you should know about.

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.