More Unpleasant Surprises Could Be In Store For Qinghai Jinrui Mining Development Co., Ltd's (SHSE:600714) Shares After Tumbling 28%

The Qinghai Jinrui Mining Development Co., Ltd (SHSE:600714) share price has softened a substantial 28% over the previous 30 days, handing back much of the gains the stock has made lately. Still, a bad month hasn't completely ruined the past year with the stock gaining 87%, which is great even in a bull market.

Even after such a large drop in price, you could still be forgiven for thinking Qinghai Jinrui Mining Development is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 8.6x, considering almost half the companies in China's Oil and Gas industry have P/S ratios below 1.2x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for Qinghai Jinrui Mining Development

How Qinghai Jinrui Mining Development Has Been Performing

Recent times have been quite advantageous for Qinghai Jinrui Mining Development as its revenue has been rising very briskly. 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. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Qinghai Jinrui Mining Development will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For Qinghai Jinrui Mining Development?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Qinghai Jinrui Mining Development's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 35% gain to the company's top line. Revenue has also lifted 17% in aggregate from three years ago, mostly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 5.9% growth in the next 12 months, the company's momentum is pretty similar based on recent medium-term annualised revenue results.

With this information, we find it interesting that Qinghai Jinrui Mining Development is trading at a high P/S compared to the industry. Apparently many investors in the company are more bullish than recent times would indicate and aren't willing to let go of their stock right now. Nevertheless, they may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Bottom Line On Qinghai Jinrui Mining Development's P/S

Qinghai Jinrui Mining Development's shares may have suffered, but its P/S remains high. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Qinghai Jinrui Mining Development revealed its three-year revenue trends aren't impacting its high P/S as much as we would have predicted, given they look similar to current industry expectations. When we see average revenue with industry-like growth combined with a high P/S, we suspect the share price is at risk of declining, bringing the P/S back in line with the industry too. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It is also worth noting that we have found 3 warning signs for Qinghai Jinrui Mining Development (1 is significant!) that you need to take into consideration.

If you're unsure about the strength of Qinghai Jinrui Mining Development'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.