Risks Still Elevated At These Prices As Guangdong Orient Zirconic Ind Sci & Tech Co.,Ltd (SZSE:002167) Shares Dive 28%

Guangdong Orient Zirconic Ind Sci & Tech Co.,Ltd (SZSE:002167) shares have retraced a considerable 28% in the last month, reversing a fair amount of their solid recent performance. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 18% in that time.

Even after such a large drop in price, given close to half the companies operating in China's Chemicals industry have price-to-sales ratios (or "P/S") below 2x, you may still consider Guangdong Orient Zirconic Ind Sci & TechLtd as a stock to potentially avoid with its 3.1x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Guangdong Orient Zirconic Ind Sci & TechLtd

How Has Guangdong Orient Zirconic Ind Sci & TechLtd Performed Recently?

The revenue growth achieved at Guangdong Orient Zirconic Ind Sci & TechLtd over the last year would be more than acceptable for most companies. 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. 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 Guangdong Orient Zirconic Ind Sci & TechLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Guangdong Orient Zirconic Ind Sci & TechLtd's Revenue Growth Trending?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Guangdong Orient Zirconic Ind Sci & TechLtd's to be considered reasonable.

If we review the last year of revenue growth, the company posted a worthy increase of 14%. Pleasingly, revenue has also lifted 77% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Weighing that recent medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 23% shows it's about the same on an annualised basis.

In light of this, it's curious that Guangdong Orient Zirconic Ind Sci & TechLtd's P/S sits above the majority of other companies. Apparently many investors in the company are more bullish than recent times would indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as a continuation of recent revenue trends would weigh down the share price eventually.

The Key Takeaway

Despite the recent share price weakness, Guangdong Orient Zirconic Ind Sci & TechLtd's P/S remains higher than most other companies in the industry. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We didn't expect to see Guangdong Orient Zirconic Ind Sci & TechLtd trade at such a high P/S considering its last three-year revenue growth has only been on par with the rest of the industry. When we see average revenue with industry-like growth combined with a high P/S, we suspect the share price is at risk of declining, bringing the P/S back in line with the industry too. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You should always think about risks. Case in point, we've spotted 1 warning sign for Guangdong Orient Zirconic Ind Sci & TechLtd you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.