Shandong Daye Co., Ltd. (SHSE:603278) Soars 42% But It's A Story Of Risk Vs Reward

Those holding Shandong Daye Co., Ltd. (SHSE:603278) shares would be relieved that the share price has rebounded 42% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. The last 30 days bring the annual gain to a very sharp 27%.

In spite of the firm bounce in price, when close to half the companies operating in China's Metals and Mining industry have price-to-sales ratios (or "P/S") above 1.2x, you may still consider Shandong Daye as an enticing stock to check out with its 0.6x P/S ratio. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Shandong Daye

How Has Shandong Daye Performed Recently?

Shandong Daye could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. 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 Shandong Daye.

Do Revenue Forecasts Match The Low P/S Ratio?

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

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 6.3%. Even so, admirably revenue has lifted 95% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Turning to the outlook, the next year should generate growth of 19% as estimated by the only analyst watching the company. With the industry only predicted to deliver 15%, the company is positioned for a stronger revenue result.

With this information, we find it odd that Shandong Daye 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.

What We Can Learn From Shandong Daye's P/S?

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

To us, it seems Shandong Daye currently trades on a significantly depressed P/S given its forecasted revenue growth is higher than the rest of its industry. There could be some major risk factors that are placing downward pressure on the P/S ratio. At least price risks look to be very low, but investors seem to think future revenues could see a lot of volatility.

Plus, you should also learn about these 3 warning signs we've spotted with Shandong Daye (including 1 which doesn't sit too well with us).

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.