With A 25% Price Drop For Fujian Kuncai Material Technology Co., Ltd. (SHSE:603826) You'll Still Get What You Pay For

Unfortunately for some shareholders, the Fujian Kuncai Material Technology Co., Ltd. (SHSE:603826) share price has dived 25% in the last thirty days, prolonging recent pain. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 44% share price drop.

Although its price has dipped substantially, given around half the companies in China's Chemicals industry have price-to-sales ratios (or "P/S") below 2.3x, you may still consider Fujian Kuncai Material Technology as a stock to avoid entirely with its 15x 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 Fujian Kuncai Material Technology

How Has Fujian Kuncai Material Technology Performed Recently?

With revenue growth that's superior to most other companies of late, Fujian Kuncai Material Technology has been doing relatively well. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. If not, then existing shareholders might be a little nervous about the viability of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Fujian Kuncai Material Technology.

Is There Enough Revenue Growth Forecasted For Fujian Kuncai Material Technology?

Fujian Kuncai Material Technology's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered an exceptional 19% gain to the company's top line. The latest three year period has also seen a 9.7% overall rise in revenue, aided extensively by its short-term performance. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Shifting to the future, estimates from the one analyst covering the company suggest revenue should grow by 100% per year over the next three years. Meanwhile, the rest of the industry is forecast to only expand by 27% each year, which is noticeably less attractive.

With this in mind, it's not hard to understand why Fujian Kuncai Material Technology's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

Fujian Kuncai Material Technology's shares may have suffered, but its P/S remains high. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Fujian Kuncai Material Technology's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.

You need to take note of risks, for example - Fujian Kuncai Material Technology has 2 warning signs (and 1 which is significant) we think 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.