Donglai Coating Technology(Shanghai)Co.,Ltd's (SHSE:688129) Price Is Out Of Tune With Revenues

When close to half the companies in the Chemicals industry in China have price-to-sales ratios (or "P/S") below 2.3x, you may consider Donglai Coating Technology(Shanghai)Co.,Ltd (SHSE:688129) as a stock to potentially avoid with its 3x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

Check out our latest analysis for Donglai Coating Technology(Shanghai)Co.Ltd

What Does Donglai Coating Technology(Shanghai)Co.Ltd's Recent Performance Look Like?

With revenue growth that's exceedingly strong of late, Donglai Coating Technology(Shanghai)Co.Ltd has been doing very well. Perhaps the market is expecting future revenue performance to outperform the wider market, which has seemingly got people interested in the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Donglai Coating Technology(Shanghai)Co.Ltd's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Donglai Coating Technology(Shanghai)Co.Ltd?

Donglai Coating Technology(Shanghai)Co.Ltd's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Taking a look back first, we see that the company grew revenue by an impressive 35% last year. The strong recent performance means it was also able to grow revenue by 31% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 22% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that Donglai Coating Technology(Shanghai)Co.Ltd's P/S sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What Does Donglai Coating Technology(Shanghai)Co.Ltd's P/S Mean For Investors?

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 Donglai Coating Technology(Shanghai)Co.Ltd 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. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You need to take note of risks, for example - Donglai Coating Technology(Shanghai)Co.Ltd has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

If you're unsure about the strength of Donglai Coating Technology(Shanghai)Co.Ltd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.