Guangxi Hechi Chemical Co., Ltd's (SZSE:000953) Shares Climb 30% But Its Business Is Yet to Catch Up

Guangxi Hechi Chemical Co., Ltd (SZSE:000953) shareholders are no doubt pleased to see that the share price has bounced 30% 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 46% in the last twelve months.

After such a large jump in price, you could be forgiven for thinking Guangxi Hechi Chemical is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 5.8x, considering almost half the companies in China's Chemicals industry have P/S ratios below 1.8x. 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.

Check out our latest analysis for Guangxi Hechi Chemical

How Has Guangxi Hechi Chemical Performed Recently?

Guangxi Hechi Chemical has been doing a good job lately as it's been growing revenue at a solid pace. One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be enough to outperform the broader industry in the near future. If not, then existing shareholders may be a little 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 Guangxi Hechi Chemical's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Guangxi Hechi Chemical?

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

If we review the last year of revenue growth, the company posted a worthy increase of 8.0%. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 17% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 23% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we find it worrying that Guangxi Hechi Chemical'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 Bottom Line On Guangxi Hechi Chemical's P/S

Guangxi Hechi Chemical's P/S has grown nicely over the last month thanks to a handy boost in the share price. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of Guangxi Hechi Chemical revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. 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 1 warning sign for Guangxi Hechi Chemical you should know about.

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.

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