Xiamen Annie Co., Ltd.'s (SZSE:002235) 29% Share Price Surge Not Quite Adding Up

Xiamen Annie Co., Ltd. (SZSE:002235) shares have continued their recent momentum with a 29% gain in the last month alone. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 17% in the last twelve months.

After such a large jump in price, when almost half of the companies in China's Forestry industry have price-to-sales ratios (or "P/S") below 2x, you may consider Xiamen Annie as a stock not worth researching with its 12.1x 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.

Check out our latest analysis for Xiamen Annie

How Has Xiamen Annie Performed Recently?

Revenue has risen firmly for Xiamen Annie recently, which is pleasing to see. Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Although there are no analyst estimates available for Xiamen Annie, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Xiamen Annie's Revenue Growth Trending?

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

Taking a look back first, we see that the company managed to grow revenues by a handy 9.3% last year. Although, the latest three year period in total hasn't been as good as it didn't manage to provide any growth at all. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Comparing that to the industry, which is predicted to deliver 16% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this in mind, we find it worrying that Xiamen Annie's P/S exceeds that of its industry peers. 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. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Key Takeaway

The strong share price surge has lead to Xiamen Annie's P/S soaring as well. 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.

Our examination of Xiamen Annie revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Having said that, be aware Xiamen Annie is showing 1 warning sign in our investment analysis, you should know about.

If you're unsure about the strength of Xiamen Annie'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.