There's Reason For Concern Over Wuxi Double Elephant Micro Fibre Material Co.,Ltd's (SZSE:002395) Massive 36% Price Jump

Wuxi Double Elephant Micro Fibre Material Co.,Ltd (SZSE:002395) shareholders would be excited to see that the share price has had a great month, posting a 36% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 41% in the last year.

After such a large jump in price, given close to half the companies operating in China's Chemicals industry have price-to-sales ratios (or "P/S") below 1.9x, you may consider Wuxi Double Elephant Micro Fibre MaterialLtd as a stock to potentially avoid with its 2.5x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

See our latest analysis for Wuxi Double Elephant Micro Fibre MaterialLtd

How Has Wuxi Double Elephant Micro Fibre MaterialLtd Performed Recently?

The recent revenue growth at Wuxi Double Elephant Micro Fibre MaterialLtd would have to be considered satisfactory if not spectacular. It might be that many expect the reasonable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. 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 Wuxi Double Elephant Micro Fibre MaterialLtd will help you shine a light on its historical performance.

How Is Wuxi Double Elephant Micro Fibre MaterialLtd's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as high as Wuxi Double Elephant Micro Fibre MaterialLtd's is when the company's growth is on track to outshine the industry.

Retrospectively, the last year delivered a decent 6.1% gain to the company's revenues. Revenue has also lifted 10% 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 respectable for the company.

Comparing that to the industry, which is predicted to deliver 25% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

In light of this, it's alarming that Wuxi Double Elephant Micro Fibre MaterialLtd'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.

What We Can Learn From Wuxi Double Elephant Micro Fibre MaterialLtd's P/S?

Wuxi Double Elephant Micro Fibre MaterialLtd shares have taken a big step in a northerly direction, but its P/S is elevated as a result. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Wuxi Double Elephant Micro Fibre MaterialLtd 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. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely 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.

Before you take the next step, you should know about the 2 warning signs for Wuxi Double Elephant Micro Fibre MaterialLtd that we have uncovered.

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.