Beihai Gofar Chuanshan Biological Co., Ltd.'s (SHSE:600538) Shares Climb 34% But Its Business Is Yet to Catch Up

Beihai Gofar Chuanshan Biological Co., Ltd. (SHSE:600538) shares have had a really impressive month, gaining 34% after a shaky period beforehand. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

Since its price has surged higher, you could be forgiven for thinking Beihai Gofar Chuanshan Biological is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 6.1x, considering almost half the companies in China's Chemicals industry have P/S ratios below 1.9x. 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 Beihai Gofar Chuanshan Biological

What Does Beihai Gofar Chuanshan Biological's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Beihai Gofar Chuanshan Biological over the last year, which is not ideal at all. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

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

How Is Beihai Gofar Chuanshan Biological's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Beihai Gofar Chuanshan Biological's to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 12%. Still, the latest three year period has seen an excellent 62% overall rise in revenue, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Comparing that to the industry, which is predicted to deliver 25% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this in mind, we find it worrying that Beihai Gofar Chuanshan Biological's P/S exceeds that of its industry peers. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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.

What Does Beihai Gofar Chuanshan Biological's P/S Mean For Investors?

Shares in Beihai Gofar Chuanshan Biological have seen a strong upwards swing lately, which has really helped boost its P/S figure. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

The fact that Beihai Gofar Chuanshan Biological 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 see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Beihai Gofar Chuanshan Biological with six simple checks on some of these key factors.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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