Benign Growth For Jiangsu Lanfeng Bio-chemical Co.,Ltd (SZSE:002513) Underpins Its Share Price

You may think that with a price-to-sales (or "P/S") ratio of 0.7x Jiangsu Lanfeng Bio-chemical Co.,Ltd (SZSE:002513) is a stock worth checking out, seeing as almost half of all the Chemicals companies in China have P/S ratios greater than 1.7x and even P/S higher than 4x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

See our latest analysis for Jiangsu Lanfeng Bio-chemicalLtd

How Has Jiangsu Lanfeng Bio-chemicalLtd Performed Recently?

Jiangsu Lanfeng Bio-chemicalLtd certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. It might be that many expect the strong revenue performance to degrade substantially, which has repressed the P/S ratio. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Jiangsu Lanfeng Bio-chemicalLtd's earnings, revenue and cash flow.

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

Jiangsu Lanfeng Bio-chemicalLtd's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

Retrospectively, the last year delivered an exceptional 80% gain to the company's top line. The latest three year period has also seen an excellent 47% overall rise in revenue, aided by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 22% 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 understandable that Jiangsu Lanfeng Bio-chemicalLtd's P/S sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

The Final Word

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Jiangsu Lanfeng Bio-chemicalLtd confirms that the company's revenue trends over the past three-year years are a key factor in its low price-to-sales ratio, as we suspected, given they fall short of current industry expectations. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Jiangsu Lanfeng Bio-chemicalLtd (1 is significant!) that you should be aware of before investing here.

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.