Suzhou Yangtze New Materials Co., Ltd.'s (SZSE:002652) Shares Climb 26% But Its Business Is Yet to Catch Up

Suzhou Yangtze New Materials Co., Ltd. (SZSE:002652) shares have had a really impressive month, gaining 26% after a shaky period beforehand. Unfortunately, despite the strong performance over the last month, the full year gain of 7.8% isn't as attractive.

Since its price has surged higher, you could be forgiven for thinking Suzhou Yangtze New Materials is a stock not worth researching with a price-to-sales ratios (or "P/S") of 3.4x, considering almost half the companies in China's Packaging industry have P/S ratios below 1.6x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Suzhou Yangtze New Materials

What Does Suzhou Yangtze New Materials' Recent Performance Look Like?

As an illustration, revenue has deteriorated at Suzhou Yangtze New Materials over the last year, which is not ideal at all. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Is There Enough Revenue Growth Forecasted For Suzhou Yangtze New Materials?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Suzhou Yangtze New Materials' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 11% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 63% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 21% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we find it worrying that Suzhou Yangtze New Materials' P/S exceeds that of its industry peers. 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 very 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.

What We Can Learn From Suzhou Yangtze New Materials' P/S?

The large bounce in Suzhou Yangtze New Materials' shares has lifted the company's P/S handsomely. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Suzhou Yangtze New Materials currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

It is also worth noting that we have found 2 warning signs for Suzhou Yangtze New Materials that you need to take into consideration.

If you're unsure about the strength of Suzhou Yangtze New Materials' 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com