Qifeng New Material Co., Ltd. (SZSE:002521) Stock Rockets 30% As Investors Are Less Pessimistic Than Expected

Despite an already strong run, Qifeng New Material Co., Ltd. (SZSE:002521) shares have been powering on, with a gain of 30% in the last thirty days. The last month tops off a massive increase of 153% in the last year.

Even after such a large jump in price, it's still not a stretch to say that Qifeng New Material's price-to-sales (or "P/S") ratio of 2x right now seems quite "middle-of-the-road" compared to the Forestry industry in China, where the median P/S ratio is around 1.7x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for Qifeng New Material

What Does Qifeng New Material's P/S Mean For Shareholders?

Revenue has risen firmly for Qifeng New Material recently, which is pleasing to see. It might be that many expect the respectable revenue performance to wane, which has kept the P/S from rising. Those who are bullish on Qifeng New Material will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Although there are no analyst estimates available for Qifeng New Material, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Some Revenue Growth Forecasted For Qifeng New Material?

The only time you'd be comfortable seeing a P/S like Qifeng New Material's is when the company's growth is tracking the industry closely.

If we review the last year of revenue growth, the company posted a terrific increase of 21%. Revenue has also lifted 17% in aggregate from three years ago, mostly 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 the recent medium-term revenue trends against the industry's one-year growth forecast of 16% shows it's noticeably less attractive.

In light of this, it's curious that Qifeng New Material's P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

What We Can Learn From Qifeng New Material's P/S?

Qifeng New Material appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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 Qifeng New Material revealed its poor three-year revenue trends aren't resulting in a lower P/S as per our expectations, given they look worse than current industry outlook. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Before you settle on your opinion, we've discovered 1 warning sign for Qifeng New Material that you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.