Qinghai Jinrui Mining Development Co., Ltd's (SHSE:600714) Share Price Could Signal Some Risk

Qinghai Jinrui Mining Development Co., Ltd's (SHSE:600714) price-to-sales (or "P/S") ratio of 7.2x may look like a poor investment opportunity when you consider close to half the companies in the Oil and Gas industry in China have P/S ratios below 1.3x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

Check out our latest analysis for Qinghai Jinrui Mining Development

What Does Qinghai Jinrui Mining Development's P/S Mean For Shareholders?

Recent times have been quite advantageous for Qinghai Jinrui Mining Development as its revenue has been rising very briskly. 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. 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?

In order to justify its P/S ratio, Qinghai Jinrui Mining Development would need to produce outstanding growth that's well in excess of the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 35%. As a result, it also grew revenue by 17% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 6.5% growth in the next 12 months, the company's momentum is pretty similar based on recent medium-term annualised revenue results.

In light of this, it's curious that Qinghai Jinrui Mining Development's P/S sits above the majority of other companies. It seems most investors are ignoring the fairly average recent growth rates and are willing to pay up for exposure to the stock. 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 Key Takeaway

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 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. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Qinghai Jinrui Mining Development (1 makes us a bit uncomfortable) you should be aware of.

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.