Why Investors Shouldn't Be Surprised By Jiangsu Fasten Company Limited's (SZSE:000890) 46% Share Price Surge

Jiangsu Fasten Company Limited (SZSE:000890) shareholders are no doubt pleased to see that the share price has bounced 46% in the last month, although it is still struggling to make up recently lost ground. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 11% in the last twelve months.

Since its price has surged higher, given around half the companies in China's Metals and Mining industry have price-to-sales ratios (or "P/S") below 1.2x, you may consider Jiangsu Fasten as a stock to avoid entirely with its 3.5x 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 Fasten

How Has Jiangsu Fasten Performed Recently?

For instance, Jiangsu Fasten'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. 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 Jiangsu Fasten, 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 Fasten's Revenue Growth Trending?

In order to justify its P/S ratio, Jiangsu Fasten 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 33%. Even so, admirably revenue has lifted 94% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Comparing that to the industry, which is only predicted to deliver 15% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised revenue results.

With this information, we can see why Jiangsu Fasten is trading at such a high P/S compared to the industry. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the wider industry.

The Final Word

The strong share price surge has lead to Jiangsu Fasten's P/S soaring as well. 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 Jiangsu Fasten maintains its high P/S on the strength of its recent three-year growth being higher than the wider industry forecast, as expected. Right now shareholders are comfortable with the P/S as they are quite confident revenue aren't under threat. If recent medium-term revenue trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Jiangsu Fasten (1 is concerning) you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.