Subdued Growth No Barrier To Zhongfu Straits (Pingtan) Development Company Limited (SZSE:000592) With Shares Advancing 41%

Zhongfu Straits (Pingtan) Development Company Limited (SZSE:000592) shares have continued their recent momentum with a 41% gain in the last month alone. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 18% in the last twelve months.

Since its price has surged higher, you could be forgiven for thinking Zhongfu Straits (Pingtan) Development is a stock not worth researching with a price-to-sales ratios (or "P/S") of 2.5x, considering almost half the companies in China's Forestry industry have P/S ratios below 1.6x. 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 Zhongfu Straits (Pingtan) Development

What Does Zhongfu Straits (Pingtan) Development's Recent Performance Look Like?

With revenue growth that's exceedingly strong of late, Zhongfu Straits (Pingtan) Development has been doing very well. The P/S ratio is probably high because investors think this strong revenue growth will be 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.

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 Zhongfu Straits (Pingtan) Development's earnings, revenue and cash flow.

How Is Zhongfu Straits (Pingtan) Development's Revenue Growth Trending?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Zhongfu Straits (Pingtan) Development's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 33% gain to the company's top line. Although, its longer-term performance hasn't been as strong with three-year revenue growth being relatively non-existent overall. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 13% shows it's noticeably less attractive.

With this information, we find it concerning that Zhongfu Straits (Pingtan) Development is trading at a P/S higher than the industry. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. 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 Zhongfu Straits (Pingtan) Development's P/S?

Zhongfu Straits (Pingtan) Development shares have taken a big step in a northerly direction, but its P/S is elevated as a result. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Zhongfu Straits (Pingtan) Development revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

Plus, you should also learn about this 1 warning sign we've spotted with Zhongfu Straits (Pingtan) Development.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.