Ganfeng Lithium Group Co., Ltd.'s (SZSE:002460) Shares Climb 35% But Its Business Is Yet to Catch Up

Ganfeng Lithium Group Co., Ltd. (SZSE:002460) shares have continued their recent momentum with a 35% gain in the last month alone. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 6.0% over the last year.

After such a large jump in price, you could be forgiven for thinking Ganfeng Lithium Group is a stock not worth researching with a price-to-sales ratios (or "P/S") of 3.9x, considering almost half the companies in China's Chemicals industry have P/S ratios below 2.4x. 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 Ganfeng Lithium Group

How Has Ganfeng Lithium Group Performed Recently?

Ganfeng Lithium Group could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Keen to find out how analysts think Ganfeng Lithium Group's future stacks up against the industry? In that case, our free report is a great place to start.

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

The only time you'd be truly comfortable seeing a P/S as high as Ganfeng Lithium Group's is when the company's growth is on track to outshine the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 47%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 144% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Turning to the outlook, the next three years should generate growth of 18% per year as estimated by the analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 30% per annum, which is noticeably more attractive.

In light of this, it's alarming that Ganfeng Lithium Group's P/S sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Bottom Line On Ganfeng Lithium Group's P/S

Ganfeng Lithium Group shares have taken a big step in a northerly direction, but its P/S is elevated as a result. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We've concluded that Ganfeng Lithium Group currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Ganfeng Lithium Group that you need to be mindful 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.