Ningbo Xianfeng New Material Co.,Ltd (SZSE:300163) Stock Rockets 29% As Investors Are Less Pessimistic Than Expected

Ningbo Xianfeng New Material Co.,Ltd (SZSE:300163) shareholders would be excited to see that the share price has had a great month, posting a 29% gain and recovering from prior weakness. Taking a wider view, although not as strong as the last month, the full year gain of 10% is also fairly reasonable.

Following the firm bounce in price, given around half the companies in China's Luxury industry have price-to-sales ratios (or "P/S") below 1.6x, you may consider Ningbo Xianfeng New MaterialLtd as a stock to avoid entirely with its 6x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Ningbo Xianfeng New MaterialLtd

How Ningbo Xianfeng New MaterialLtd Has Been Performing

For example, consider that Ningbo Xianfeng New MaterialLtd's financial performance has been pretty ordinary lately as revenue growth is non-existent. It might be that many are expecting an improvement to the uninspiring revenue performance over the coming period, which has kept the P/S from collapsing. If not, then existing shareholders may be a little nervous about the viability of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Ningbo Xianfeng New MaterialLtd will help you shine a light on its historical performance.

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

The only time you'd be truly comfortable seeing a P/S as steep as Ningbo Xianfeng New MaterialLtd's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered virtually the same number to the company's top line as the year before. The lack of growth did nothing to help the company's aggregate three-year performance, which is an unsavory 9.9% drop in revenue. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 13% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that Ningbo Xianfeng New MaterialLtd is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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 Ningbo Xianfeng New MaterialLtd's P/S?

Shares in Ningbo Xianfeng New MaterialLtd 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.

We've established that Ningbo Xianfeng New MaterialLtd 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. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

It is also worth noting that we have found 1 warning sign for Ningbo Xianfeng New MaterialLtd that you need to take into consideration.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.