The Market Lifts Chongqing Sifang New Material Co., Ltd. (SHSE:605122) Shares 43% But It Can Do More

The Chongqing Sifang New Material Co., Ltd. (SHSE:605122) share price has done very well over the last month, posting an excellent gain of 43%. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 9.4% in the last twelve months.

Although its price has surged higher, you could still be forgiven for feeling indifferent about Chongqing Sifang New Material's P/S ratio of 1.3x, since the median price-to-sales (or "P/S") ratio for the Basic Materials industry in China is about the same. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

View our latest analysis for Chongqing Sifang New Material

How Has Chongqing Sifang New Material Performed Recently?

For example, consider that Chongqing Sifang New Material's financial performance has been poor lately as its revenue has been in decline. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

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

How Is Chongqing Sifang New Material's Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like Chongqing Sifang New Material's is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered a frustrating 7.8% decrease to the company's top line. Even so, admirably revenue has lifted 46% 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.

Comparing that to the industry, which is only predicted to deliver 7.5% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised revenue results.

In light of this, it's curious that Chongqing Sifang New Material's P/S sits in line with the majority of other companies. It may be that most investors are not convinced the company can maintain its recent growth rates.

The Key Takeaway

Its shares have lifted substantially and now Chongqing Sifang New Material's P/S is back within range of the industry median. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We've established that Chongqing Sifang New Material currently trades on a lower than expected P/S since its recent three-year growth is higher than the wider industry forecast. It'd be fair to assume that potential risks the company faces could be the contributing factor to the lower than expected P/S. At least the risk of a price drop looks to be subdued if recent medium-term revenue trends continue, but investors seem to think future revenue could see some volatility.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Chongqing Sifang New Material that you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.