Gansu Mogao Industrial Development Co.,Ltd (SHSE:600543) Stock Rockets 30% As Investors Are Less Pessimistic Than Expected

Gansu Mogao Industrial Development Co.,Ltd (SHSE:600543) shareholders have had their patience rewarded with a 30% share price jump in the last month. Looking further back, the 16% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Since its price has surged higher, when almost half of the companies in China's Beverage industry have price-to-sales ratios (or "P/S") below 4.9x, you may consider Gansu Mogao Industrial DevelopmentLtd as a stock not worth researching with its 8.5x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Gansu Mogao Industrial DevelopmentLtd

How Has Gansu Mogao Industrial DevelopmentLtd Performed Recently?

Gansu Mogao Industrial DevelopmentLtd certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. Perhaps the market is expecting future revenue performance to outperform the wider market, which has seemingly got people interested in the stock. 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 Gansu Mogao Industrial DevelopmentLtd's earnings, revenue and cash flow.

What Are Revenue Growth Metrics Telling Us About The High P/S?

In order to justify its P/S ratio, Gansu Mogao Industrial DevelopmentLtd 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 72%. Pleasingly, revenue has also lifted 53% 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.

Weighing that recent medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 16% shows it's about the same on an annualised basis.

In light of this, it's curious that Gansu Mogao Industrial DevelopmentLtd'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. Although, additional gains will be difficult to achieve as a continuation of recent revenue trends would weigh down the share price eventually.

The Bottom Line On Gansu Mogao Industrial DevelopmentLtd's P/S

The strong share price surge has lead to Gansu Mogao Industrial DevelopmentLtd's P/S soaring as well. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our look into Gansu Mogao Industrial DevelopmentLtd has shown that it currently trades on a higher than expected P/S since its recent three-year growth is only in line with the wider industry forecast. Right now we are uncomfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Gansu Mogao Industrial DevelopmentLtd, and understanding these should be part of your investment process.

If these risks are making you reconsider your opinion on Gansu Mogao Industrial DevelopmentLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.