Why We're Not Concerned Yet About GuoCheng Mining CO.,LTD's (SZSE:000688) 25% Share Price Plunge

The GuoCheng Mining CO.,LTD (SZSE:000688) share price has softened a substantial 25% over the previous 30 days, handing back much of the gains the stock has made lately. Longer-term, the stock has been solid despite a difficult 30 days, gaining 11% in the last year.

In spite of the heavy fall in price, given around half the companies in China's Metals and Mining industry have price-to-sales ratios (or "P/S") below 1.3x, you may still consider GuoCheng MiningLTD as a stock to avoid entirely with its 7.1x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for GuoCheng MiningLTD

What Does GuoCheng MiningLTD's Recent Performance Look Like?

Recent times have been quite advantageous for GuoCheng MiningLTD as its revenue has been rising very briskly. It seems that many are expecting the strong revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like GuoCheng MiningLTD's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 46% last year. Pleasingly, revenue has also lifted 61% in aggregate from three years ago, thanks to the last 12 months of growth. 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 14% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that GuoCheng MiningLTD's P/S sits above the majority of other companies. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Bottom Line On GuoCheng MiningLTD's P/S

Even after such a strong price drop, GuoCheng MiningLTD's P/S still exceeds the industry median significantly. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of GuoCheng MiningLTD revealed its three-year revenue trends are contributing to its high P/S, given they look better than current industry expectations. At this stage investors feel the potential continued revenue growth in the future is great enough to warrant an inflated P/S. Barring any significant changes to the company's ability to make money, the share price should continue to be propped up.

Plus, you should also learn about these 3 warning signs we've spotted with GuoCheng MiningLTD (including 1 which makes us a bit uncomfortable).

If these risks are making you reconsider your opinion on GuoCheng MiningLTD, explore our interactive list of high quality stocks to get an idea of what else is out there.

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.