Investors Still Aren't Entirely Convinced By Yangmei Chemical Co.,Ltd's (SHSE:600691) Revenues Despite 27% Price Jump

Yangmei Chemical Co.,Ltd (SHSE:600691) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 44% in the last twelve months.

In spite of the firm bounce in price, Yangmei ChemicalLtd's price-to-sales (or "P/S") ratio of 0.4x might still make it look like a buy right now compared to the Chemicals industry in China, where around half of the companies have P/S ratios above 1.7x and even P/S above 4x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

See our latest analysis for Yangmei ChemicalLtd

What Does Yangmei ChemicalLtd's Recent Performance Look Like?

Yangmei ChemicalLtd hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Yangmei ChemicalLtd.

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

In order to justify its P/S ratio, Yangmei ChemicalLtd would need to produce sluggish growth that's trailing the industry.

Retrospectively, the last year delivered a frustrating 32% decrease to the company's top line. As a result, revenue from three years ago have also fallen 48% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Shifting to the future, estimates from the only analyst covering the company suggest revenue should grow by 58% over the next year. That's shaping up to be materially higher than the 22% growth forecast for the broader industry.

With this information, we find it odd that Yangmei ChemicalLtd is trading at a P/S lower than the industry. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Final Word

Despite Yangmei ChemicalLtd's share price climbing recently, its P/S still lags most other companies. 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.

Yangmei ChemicalLtd's analyst forecasts revealed that its superior revenue outlook isn't contributing to its P/S anywhere near as much as we would have predicted. There could be some major risk factors that are placing downward pressure on the P/S ratio. While the possibility of the share price plunging seems unlikely due to the high growth forecasted for the company, the market does appear to have some hesitation.

Having said that, be aware Yangmei ChemicalLtd is showing 1 warning sign in our investment analysis, you should know about.

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.