What Zhe Jiang Kangsheng Co.,Ltd.'s (SZSE:002418) 29% Share Price Gain Is Not Telling You

Zhe Jiang Kangsheng Co.,Ltd. (SZSE:002418) shares have continued their recent momentum with a 29% gain in the last month alone. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 18% over that time.

In spite of the firm bounce in price, there still wouldn't be many who think Zhe Jiang KangshengLtd's price-to-sales (or "P/S") ratio of 1.2x is worth a mention when the median P/S in China's Metals and Mining industry is similar at about 1.3x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

See our latest analysis for Zhe Jiang KangshengLtd

What Does Zhe Jiang KangshengLtd's Recent Performance Look Like?

For example, consider that Zhe Jiang KangshengLtd's financial performance has been poor lately as its revenue has been in decline. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. If not, then existing shareholders may be a little nervous about the viability of the share price.

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

How Is Zhe Jiang KangshengLtd's Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Zhe Jiang KangshengLtd's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 9.5% 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 11% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

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 somewhat alarming that Zhe Jiang KangshengLtd's P/S sits in line with the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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 the recent negative growth rates.

The Final Word

Its shares have lifted substantially and now Zhe Jiang KangshengLtd's P/S is back within range of the industry median. 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 find it unexpected that Zhe Jiang KangshengLtd trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Having said that, be aware Zhe Jiang KangshengLtd is showing 3 warning signs in our investment analysis, and 1 of those can't be ignored.

If you're unsure about the strength of Zhe Jiang KangshengLtd'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.