What Zhuhai Zhongfu Enterprise Co.,Ltd's (SZSE:000659) 27% Share Price Gain Is Not Telling You

Despite an already strong run, Zhuhai Zhongfu Enterprise Co.,Ltd (SZSE:000659) shares have been powering on, with a gain of 27% in the last thirty days. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 26% in the last twelve months.

Following the firm bounce in price, you could be forgiven for thinking Zhuhai Zhongfu EnterpriseLtd is a stock not worth researching with a price-to-sales ratios (or "P/S") of 2.6x, considering almost half the companies in China's Packaging industry 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.

See our latest analysis for Zhuhai Zhongfu EnterpriseLtd

How Zhuhai Zhongfu EnterpriseLtd Has Been Performing

For instance, Zhuhai Zhongfu EnterpriseLtd'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. If not, then existing shareholders may be quite nervous about the viability of the share price.

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 Zhuhai Zhongfu EnterpriseLtd's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Zhuhai Zhongfu EnterpriseLtd?

Zhuhai Zhongfu EnterpriseLtd'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, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 20%. As a result, revenue from three years ago have also fallen 22% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 20% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Zhuhai Zhongfu EnterpriseLtd's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate 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.

The Key Takeaway

The large bounce in Zhuhai Zhongfu EnterpriseLtd's shares has lifted the company's P/S handsomely. 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.

We've established that Zhuhai Zhongfu EnterpriseLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Zhuhai Zhongfu EnterpriseLtd (of which 1 shouldn't be ignored!) you should know about.

If you're unsure about the strength of Zhuhai Zhongfu EnterpriseLtd'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.