Jiangsu Zhongsheng Gaoke Environmental Co.,Ltd.'s (SZSE:002778) 38% Share Price Surge Not Quite Adding Up

Jiangsu Zhongsheng Gaoke Environmental Co.,Ltd. (SZSE:002778) shareholders have had their patience rewarded with a 38% share price jump in the last month. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

Since its price has surged higher, you could be forgiven for thinking Jiangsu Zhongsheng Gaoke EnvironmentalLtd is a stock not worth researching with a price-to-sales ratios (or "P/S") of 3.2x, considering almost half the companies in China's Chemicals industry have P/S ratios below 2.1x. 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 Jiangsu Zhongsheng Gaoke EnvironmentalLtd

What Does Jiangsu Zhongsheng Gaoke EnvironmentalLtd's Recent Performance Look Like?

For instance, Jiangsu Zhongsheng Gaoke EnvironmentalLtd's receding revenue in recent times would have to be some food for thought. 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 Jiangsu Zhongsheng Gaoke EnvironmentalLtd will help you shine a light on its historical performance.

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

In order to justify its P/S ratio, Jiangsu Zhongsheng Gaoke EnvironmentalLtd would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered a frustrating 36% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 53% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 21% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that Jiangsu Zhongsheng Gaoke EnvironmentalLtd is trading at a P/S higher than the industry. 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 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.

The Final Word

Jiangsu Zhongsheng Gaoke EnvironmentalLtd shares have taken a big step in a northerly direction, but its P/S is elevated as a result. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Jiangsu Zhongsheng Gaoke EnvironmentalLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you settle on your opinion, we've discovered 2 warning signs for Jiangsu Zhongsheng Gaoke EnvironmentalLtd that you should be aware of.

If these risks are making you reconsider your opinion on Jiangsu Zhongsheng Gaoke EnvironmentalLtd, 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.