There's Reason For Concern Over Gansu Mogao Industrial Development Co.,Ltd's (SHSE:600543) Massive 28% Price Jump

Gansu Mogao Industrial Development Co.,Ltd (SHSE:600543) shareholders are no doubt pleased to see that the share price has bounced 28% in the last month, although it is still struggling to make up recently lost ground. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 2.7% over the last year.

Following the firm bounce in price, you could be forgiven for thinking Gansu Mogao Industrial DevelopmentLtd is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 10.2x, considering almost half the companies in China's Beverage industry have P/S ratios below 5.4x. 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

What Does Gansu Mogao Industrial DevelopmentLtd's P/S Mean For Shareholders?

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.

Taking a look back first, we see that the company grew revenue by an impressive 54% last year. The latest three year period has also seen an excellent 32% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 18% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Gansu Mogao Industrial DevelopmentLtd is trading at a P/S higher than the industry. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What We Can Learn From 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. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

The fact that Gansu Mogao Industrial DevelopmentLtd currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

Before you take the next step, you should know about the 1 warning sign for Gansu Mogao Industrial DevelopmentLtd that we have uncovered.

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.