Why Investors Shouldn't Be Surprised By Jilin Liyuan Precision Manufacturing Co., Ltd.'s (SZSE:002501) 33% Share Price Surge

Jilin Liyuan Precision Manufacturing Co., Ltd. (SZSE:002501) shareholders have had their patience rewarded with a 33% share price jump in the last month. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 5.5% over the last year.

After such a large jump in price, when almost half of the companies in China's Metals and Mining industry have price-to-sales ratios (or "P/S") below 1.4x, you may consider Jilin Liyuan Precision Manufacturing as a stock not worth researching with its 11.9x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for Jilin Liyuan Precision Manufacturing

What Does Jilin Liyuan Precision Manufacturing's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Jilin Liyuan Precision Manufacturing over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. 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 Jilin Liyuan Precision Manufacturing, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

Jilin Liyuan Precision Manufacturing's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 26%. Even so, admirably revenue has lifted 93% in aggregate from three years ago, notwithstanding the last 12 months. 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.

This is in contrast to the rest of the industry, which is expected to grow by 13% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Jilin Liyuan Precision Manufacturing's P/S sits above the majority of other companies. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

What We Can Learn From Jilin Liyuan Precision Manufacturing's P/S?

The strong share price surge has lead to Jilin Liyuan Precision Manufacturing's P/S soaring as well. 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.

As we suspected, our examination of Jilin Liyuan Precision Manufacturing revealed its three-year revenue trends are contributing to its high P/S, given they look better than current industry expectations. Right now shareholders are comfortable with the P/S as they are quite confident revenue aren't under threat. If recent medium-term revenue trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

Before you take the next step, you should know about the 1 warning sign for Jilin Liyuan Precision Manufacturing that we have uncovered.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.