Jiangxi Guoguang Commercial Chains Co., Ltd.'s (SHSE:605188) 26% Share Price Surge Not Quite Adding Up

Jiangxi Guoguang Commercial Chains Co., Ltd. (SHSE:605188) shares have continued their recent momentum with a 26% gain in the last month alone. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 18% over that time.

Following the firm bounce in price, given close to half the companies operating in China's Consumer Retailing industry have price-to-sales ratios (or "P/S") below 0.6x, you may consider Jiangxi Guoguang Commercial Chains as a stock to potentially avoid with its 1.8x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

View our latest analysis for Jiangxi Guoguang Commercial Chains

How Jiangxi Guoguang Commercial Chains Has Been Performing

Jiangxi Guoguang Commercial Chains has been doing a good job lately as it's been growing revenue at a solid pace. 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. 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 Jiangxi Guoguang Commercial Chains' earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Jiangxi Guoguang Commercial Chains?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Jiangxi Guoguang Commercial Chains' to be considered reasonable.

Retrospectively, the last year delivered a decent 8.1% gain to the company's revenues. The solid recent performance means it was also able to grow revenue by 14% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Comparing that to the industry, which is predicted to deliver 15% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this in mind, we find it worrying that Jiangxi Guoguang Commercial Chains' P/S exceeds that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates 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.

What We Can Learn From Jiangxi Guoguang Commercial Chains' P/S?

Jiangxi Guoguang Commercial Chains' P/S is on the rise since its shares have risen strongly. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Jiangxi Guoguang Commercial Chains revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Jiangxi Guoguang Commercial Chains (1 can't be ignored!) that you should be aware of before investing here.

If you're unsure about the strength of Jiangxi Guoguang Commercial Chains' 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.

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