Zhejiang Zhongjian Technology Co.,Ltd (SZSE:002779) Stocks Shoot Up 32% But Its P/S Still Looks Reasonable

Zhejiang Zhongjian Technology Co.,Ltd (SZSE:002779) shares have continued their recent momentum with a 32% gain in the last month alone. The annual gain comes to 219% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, you could be forgiven for thinking Zhejiang Zhongjian TechnologyLtd is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 14.2x, considering almost half the companies in China's Consumer Durables industry have P/S ratios below 2.1x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Zhejiang Zhongjian TechnologyLtd

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

With revenue growth that's exceedingly strong of late, Zhejiang Zhongjian TechnologyLtd has been doing very well. 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 Zhejiang Zhongjian TechnologyLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Zhejiang Zhongjian TechnologyLtd's Revenue Growth Trending?

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%. The latest three year period has also seen an excellent 66% overall rise in revenue, aided by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 11% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this in consideration, it's not hard to understand why Zhejiang Zhongjian TechnologyLtd's P/S is high relative to its industry peers. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

What We Can Learn From Zhejiang Zhongjian TechnologyLtd's P/S?

Shares in Zhejiang Zhongjian TechnologyLtd 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.

We've established that Zhejiang Zhongjian TechnologyLtd maintains its high P/S on the strength of its recent three-year growth being higher than the wider industry forecast, as expected. Right now shareholders are comfortable with the P/S as they are quite confident revenue aren't under threat. If recent medium-term revenue trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Zhejiang Zhongjian TechnologyLtd (of which 1 makes us a bit uncomfortable!) you should know about.

If you're unsure about the strength of Zhejiang Zhongjian TechnologyLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.