Unpleasant Surprises Could Be In Store For Fujian Jinsen Forestry Co.,Ltd's (SZSE:002679) Shares

Fujian Jinsen Forestry Co.,Ltd's (SZSE:002679) price-to-sales (or "P/S") ratio of 12.7x may look like a poor investment opportunity when you consider close to half the companies in the Forestry industry in China have P/S ratios below 1.6x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Fujian Jinsen ForestryLtd

How Has Fujian Jinsen ForestryLtd Performed Recently?

As an illustration, revenue has deteriorated at Fujian Jinsen ForestryLtd over the last year, which is not ideal at all. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

Is There Enough Revenue Growth Forecasted For Fujian Jinsen ForestryLtd?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Fujian Jinsen ForestryLtd's to be considered reasonable.

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 1.4%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 30% overall rise in revenue. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 16% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that Fujian Jinsen ForestryLtd's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Key Takeaway

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Fujian Jinsen ForestryLtd revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

Plus, you should also learn about these 3 warning signs we've spotted with Fujian Jinsen ForestryLtd (including 1 which is significant).

If these risks are making you reconsider your opinion on Fujian Jinsen ForestryLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.