Revenues Not Telling The Story For Jiangxi Hungpai New Material Co., Ltd. (SHSE:605366) After Shares Rise 36%

Those holding Jiangxi Hungpai New Material Co., Ltd. (SHSE:605366) shares would be relieved that the share price has rebounded 36% 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.

Since its price has surged higher, you could be forgiven for thinking Jiangxi Hungpai New Material is a stock not worth researching with a price-to-sales ratios (or "P/S") of 3.5x, considering almost half the companies in China's Chemicals industry have P/S ratios below 2.1x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Jiangxi Hungpai New Material

What Does Jiangxi Hungpai New Material's P/S Mean For Shareholders?

For instance, Jiangxi Hungpai New Material's receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

How Is Jiangxi Hungpai New Material's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as high as Jiangxi Hungpai New Material's is when the company's growth is on track to outshine 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 24%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 45% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 25% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that Jiangxi Hungpai New Material's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What We Can Learn From Jiangxi Hungpai New Material's P/S?

Jiangxi Hungpai New Material shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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.

The fact that Jiangxi Hungpai New Material currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

You need to take note of risks, for example - Jiangxi Hungpai New Material has 4 warning signs (and 2 which are a bit unpleasant) we think you should know about.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.