There's Reason For Concern Over Zhejiang Kan Specialities Material Co., Ltd.'s (SZSE:002012) Massive 27% Price Jump

Zhejiang Kan Specialities Material Co., Ltd. (SZSE:002012) shares have continued their recent momentum with a 27% gain in the last month alone. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 2.3% in the last twelve months.

Since its price has surged higher, when almost half of the companies in China's Forestry industry have price-to-sales ratios (or "P/S") below 1.6x, you may consider Zhejiang Kan Specialities Material as a stock not worth researching with its 4.4x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for Zhejiang Kan Specialities Material

What Does Zhejiang Kan Specialities Material's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Zhejiang Kan Specialities Material over the last year, which is not ideal at all. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. However, if this isn't the case, investors might get caught out paying too much for the stock.

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 Zhejiang Kan Specialities Material's earnings, revenue and cash flow.

How Is Zhejiang Kan Specialities Material's Revenue Growth Trending?

In order to justify its P/S ratio, Zhejiang Kan Specialities Material would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a frustrating 41% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 70% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 16% shows it's an unpleasant look.

In light of this, it's alarming that Zhejiang Kan Specialities Material's P/S sits above the majority of other companies. 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. 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 Zhejiang Kan Specialities Material's P/S

Zhejiang Kan Specialities Material'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.

We've established that Zhejiang Kan Specialities Material currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. 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.

You need to take note of risks, for example - Zhejiang Kan Specialities Material has 3 warning signs (and 1 which can't be ignored) we think 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.