Jiangsu HSC New Energy Materials Co.,LTD.'s (SHSE:688353) Shares Climb 47% But Its Business Is Yet to Catch Up

Jiangsu HSC New Energy Materials Co.,LTD. (SHSE:688353) shareholders have had their patience rewarded with a 47% share price jump in the last month. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 23% over that time.

After such a large jump in price, given around half the companies in China's Chemicals industry have price-to-sales ratios (or "P/S") below 2.2x, you may consider Jiangsu HSC New Energy MaterialsLTD as a stock to avoid entirely with its 8.1x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

View our latest analysis for Jiangsu HSC New Energy MaterialsLTD

How Jiangsu HSC New Energy MaterialsLTD Has Been Performing

For instance, Jiangsu HSC New Energy MaterialsLTD's receding revenue in recent times would have to be some food for thought. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. If not, then existing shareholders may be quite nervous about the viability of the share price.

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

How Is Jiangsu HSC New Energy MaterialsLTD's Revenue Growth Trending?

In order to justify its P/S ratio, Jiangsu HSC New Energy MaterialsLTD would need to produce outstanding growth that's well in excess of 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 17%. The last three years don't look nice either as the company has shrunk revenue by 55% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 21% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this information, we find it concerning that Jiangsu HSC New Energy MaterialsLTD is trading at a P/S higher than the industry. 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 very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What We Can Learn From Jiangsu HSC New Energy MaterialsLTD's P/S?

Shares in Jiangsu HSC New Energy MaterialsLTD have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

We've established that Jiangsu HSC New Energy MaterialsLTD currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Jiangsu HSC New Energy MaterialsLTD you should know about.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.