Guangdong Rongtai Industry Co.,Ltd's (SHSE:600589) 30% Share Price Surge Not Quite Adding Up

Those holding Guangdong Rongtai Industry Co.,Ltd (SHSE:600589) shares would be relieved that the share price has rebounded 30% 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 33% over that time.

After such a large jump in price, when almost half of the companies in China's Chemicals industry have price-to-sales ratios (or "P/S") below 1.7x, you may consider Guangdong Rongtai IndustryLtd as a stock not worth researching with its 11.8x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for Guangdong Rongtai IndustryLtd

How Has Guangdong Rongtai IndustryLtd Performed Recently?

Guangdong Rongtai IndustryLtd 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.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Guangdong Rongtai IndustryLtd will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For Guangdong Rongtai IndustryLtd?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Guangdong Rongtai IndustryLtd's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 34% gain to the company's top line. Still, revenue has fallen 67% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 22% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this information, we find it concerning that Guangdong Rongtai IndustryLtd is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Key Takeaway

The strong share price surge has lead to Guangdong Rongtai IndustryLtd's P/S soaring as well. 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 Guangdong Rongtai IndustryLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Guangdong Rongtai IndustryLtd (1 is significant!) that you need to be mindful of.

If you're unsure about the strength of Guangdong Rongtai IndustryLtd'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.