Zhejiang Kan Specialities Material Co., Ltd. (SZSE:002012) Stock Rockets 26% As Investors Are Less Pessimistic Than Expected

Despite an already strong run, Zhejiang Kan Specialities Material Co., Ltd. (SZSE:002012) shares have been powering on, with a gain of 26% in the last thirty days. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 23% over that time.

Since its price has surged higher, given close to half the companies operating in China's Forestry industry have price-to-sales ratios (or "P/S") below 1.5x, you may consider Zhejiang Kan Specialities Material as a stock to potentially avoid with its 3.3x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Zhejiang Kan Specialities Material

How Zhejiang Kan Specialities Material Has Been Performing

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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Zhejiang Kan Specialities Material will help you shine a light on its historical performance.

What Are Revenue Growth Metrics Telling Us About The High P/S?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Zhejiang Kan Specialities Material's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 47% decrease to the company's top line. As a result, revenue from three years ago have also fallen 69% overall. 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 13% 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 shares have taken a big step in a northerly direction, but its P/S is elevated as a result. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

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. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Having said that, be aware Zhejiang Kan Specialities Material is showing 3 warning signs in our investment analysis, and 2 of those are significant.

If you're unsure about the strength of Zhejiang Kan Specialities Material'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.