Xinjiang Zhundong Petroleum Technology Co., Ltd.'s (SZSE:002207) 25% Share Price Surge Not Quite Adding Up

Those holding Xinjiang Zhundong Petroleum Technology Co., Ltd. (SZSE:002207) shares would be relieved that the share price has rebounded 25% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 28% over that time.

Since its price has surged higher, given around half the companies in China's Energy Services industry have price-to-sales ratios (or "P/S") below 1.9x, you may consider Xinjiang Zhundong Petroleum Technology as a stock to avoid entirely with its 4.6x P/S ratio. 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.

See our latest analysis for Xinjiang Zhundong Petroleum Technology

How Xinjiang Zhundong Petroleum Technology Has Been Performing

Recent times have been quite advantageous for Xinjiang Zhundong Petroleum Technology 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

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

Is There Enough Revenue Growth Forecasted For Xinjiang Zhundong Petroleum Technology?

In order to justify its P/S ratio, Xinjiang Zhundong Petroleum Technology would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered an exceptional 41% gain to the company's top line. Pleasingly, revenue has also lifted 41% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 18% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

In light of this, it's alarming that Xinjiang Zhundong Petroleum Technology's P/S sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Bottom Line On Xinjiang Zhundong Petroleum Technology's P/S

Shares in Xinjiang Zhundong Petroleum Technology have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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 Xinjiang Zhundong Petroleum Technology 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. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Xinjiang Zhundong Petroleum Technology (at least 1 which is potentially serious), and understanding them should be part of your investment process.

If you're unsure about the strength of Xinjiang Zhundong Petroleum 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.