Chengdu Qushui Science and Technology Co., Ltd.'s (SZSE:301336) 27% Price Boost Is Out Of Tune With Revenues

Chengdu Qushui Science and Technology Co., Ltd. (SZSE:301336) shares have continued their recent momentum with a 27% gain in the last month alone. The annual gain comes to 133% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, you could be forgiven for thinking Chengdu Qushui Science and Technology is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 10x, considering almost half the companies in China's Consumer Durables industry have P/S ratios below 2.2x. 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 Chengdu Qushui Science and Technology

How Chengdu Qushui Science and Technology Has Been Performing

The revenue growth achieved at Chengdu Qushui Science and Technology over the last year would be more than acceptable for most companies. One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be enough to outperform the broader industry in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

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

How Is Chengdu Qushui Science and Technology's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Chengdu Qushui Science and Technology's is when the company's growth is on track to outshine the industry decidedly.

Taking a look back first, we see that the company managed to grow revenues by a handy 11% last year. Still, lamentably revenue has fallen 36% in aggregate from three years ago, which is disappointing. 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.

With this information, we find it concerning that Chengdu Qushui Science and Technology 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. 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.

The Final Word

Shares in Chengdu Qushui Science and Technology have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

Our examination of Chengdu Qushui Science and Technology revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. 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.

You should always think about risks. Case in point, we've spotted 3 warning signs for Chengdu Qushui Science and Technology you should be aware of, and 2 of them are concerning.

If you're unsure about the strength of Chengdu Qushui Science and Technology's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.