Zhongfu Straits (Pingtan) Development Company Limited's (SZSE:000592) Shares May Have Run Too Fast Too Soon

Zhongfu Straits (Pingtan) Development Company Limited's (SZSE:000592) price-to-sales (or "P/S") ratio of 2.2x may not look like an appealing investment opportunity when you consider close to half the companies in the Forestry industry in China have P/S ratios below 1.5x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

View our latest analysis for Zhongfu Straits (Pingtan) Development

How Zhongfu Straits (Pingtan) Development Has Been Performing

Recent times have been quite advantageous for Zhongfu Straits (Pingtan) Development as its revenue has been rising very briskly. 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.

Although there are no analyst estimates available for Zhongfu Straits (Pingtan) Development, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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

In order to justify its P/S ratio, Zhongfu Straits (Pingtan) Development would need to produce impressive growth in excess of the industry.

Taking a look back first, we see that the company grew revenue by an impressive 35% last year. Revenue has also lifted 13% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 15% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in mind, we find it worrying that Zhongfu Straits (Pingtan) Development's P/S exceeds that of its industry peers. 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.

The Bottom Line On Zhongfu Straits (Pingtan) Development's P/S

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

The fact that Zhongfu Straits (Pingtan) Development 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.

Before you settle on your opinion, we've discovered 1 warning sign for Zhongfu Straits (Pingtan) Development that you should be aware of.

If you're unsure about the strength of Zhongfu Straits (Pingtan) Development'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.