Tongyi Carbon Neutral Technology (Xinjiang) Co., Ltd (SHSE:600506) Soars 27% But It's A Story Of Risk Vs Reward

Tongyi Carbon Neutral Technology (Xinjiang) Co., Ltd (SHSE:600506) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 77% in the last year.

Although its price has surged higher, you could still be forgiven for feeling indifferent about Tongyi Carbon Neutral Technology (Xinjiang)'s P/S ratio of 1.9x, since the median price-to-sales (or "P/S") ratio for the Food industry in China is also close to 1.8x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Check out our latest analysis for Tongyi Carbon Neutral Technology (Xinjiang)

What Does Tongyi Carbon Neutral Technology (Xinjiang)'s P/S Mean For Shareholders?

Tongyi Carbon Neutral Technology (Xinjiang) has been doing a decent job lately as it's been growing revenue at a reasonable pace. It might be that many expect the respectable revenue performance to only match most other companies over the coming period, which has kept the P/S from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

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 Tongyi Carbon Neutral Technology (Xinjiang)'s earnings, revenue and cash flow.

Do Revenue Forecasts Match The P/S Ratio?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Tongyi Carbon Neutral Technology (Xinjiang)'s to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 3.3% last year. Spectacularly, three year revenue growth has ballooned by several orders of magnitude, even though the last 12 months were fairly tame in comparison. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.

Comparing that to the industry, which is only predicted to deliver 13% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised revenue results.

In light of this, it's curious that Tongyi Carbon Neutral Technology (Xinjiang)'s P/S sits in line with the majority of other companies. Apparently some shareholders believe the recent performance is at its limits and have been accepting lower selling prices.

What Does Tongyi Carbon Neutral Technology (Xinjiang)'s P/S Mean For Investors?

Tongyi Carbon Neutral Technology (Xinjiang)'s stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that Tongyi Carbon Neutral Technology (Xinjiang) currently trades on a lower than expected P/S since its recent three-year growth is higher than the wider industry forecast. There could be some unobserved threats to revenue preventing the P/S ratio from matching this positive performance. It appears some are indeed anticipating revenue instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

It is also worth noting that we have found 3 warning signs for Tongyi Carbon Neutral Technology (Xinjiang) (2 are significant!) that you need to take into consideration.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.