There's Reason For Concern Over Shenzhen Prince New Materials Co.,Ltd.'s (SZSE:002735) Massive 37% Price Jump

Those holding Shenzhen Prince New Materials Co.,Ltd. (SZSE:002735) shares would be relieved that the share price has rebounded 37% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 25% over that time.

Since its price has surged higher, when almost half of the companies in China's Packaging industry have price-to-sales ratios (or "P/S") below 2x, you may consider Shenzhen Prince New MaterialsLtd as a stock probably not worth researching with its 2.9x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

View our latest analysis for Shenzhen Prince New MaterialsLtd

What Does Shenzhen Prince New MaterialsLtd's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Shenzhen Prince New MaterialsLtd 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.

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 Shenzhen Prince New MaterialsLtd's earnings, revenue and cash flow.

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

In order to justify its P/S ratio, Shenzhen Prince New MaterialsLtd would need to produce impressive growth in excess of the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 3.5%. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 17% in total. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

This is in contrast to the rest of the industry, which is expected to grow by 20% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Shenzhen Prince New MaterialsLtd is trading at a P/S higher than the industry. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. 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.

What Does Shenzhen Prince New MaterialsLtd's P/S Mean For Investors?

Shenzhen Prince New MaterialsLtd's P/S is on the rise since its shares have risen strongly. 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.

The fact that Shenzhen Prince New MaterialsLtd currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

There are also other vital risk factors to consider and we've discovered 4 warning signs for Shenzhen Prince New MaterialsLtd (1 shouldn't be ignored!) that you should be aware of before investing here.

If these risks are making you reconsider your opinion on Shenzhen Prince New MaterialsLtd, 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.