Jiangsu Zhongsheng Gaoke Environmental Co.,Ltd.'s (SZSE:002778) Share Price Could Signal Some Risk
Jiangsu Zhongsheng Gaoke Environmental Co.,Ltd.'s (SZSE:002778) price-to-sales (or "P/S") ratio of 4.8x may look like a poor investment opportunity when you consider close to half the companies in the Chemicals industry in China have P/S ratios below 2.5x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.
View our latest analysis for Jiangsu Zhongsheng Gaoke EnvironmentalLtd
How Has Jiangsu Zhongsheng Gaoke EnvironmentalLtd Performed Recently?
As an illustration, revenue has deteriorated at Jiangsu Zhongsheng Gaoke EnvironmentalLtd 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. If not, then existing shareholders may be quite nervous about the viability of the share price.
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.How Is Jiangsu Zhongsheng Gaoke EnvironmentalLtd's Revenue Growth Trending?
There's an inherent assumption that a company should far outperform the industry for P/S ratios like Jiangsu Zhongsheng Gaoke EnvironmentalLtd's to be considered reasonable.
In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 42%. The last three years don't look nice either as the company has shrunk revenue by 54% 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 25% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.
In light of this, it's alarming that Jiangsu Zhongsheng Gaoke EnvironmentalLtd'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. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.
What Does Jiangsu Zhongsheng Gaoke EnvironmentalLtd's P/S Mean For Investors?
While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.
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. 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. 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.
Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Jiangsu Zhongsheng Gaoke EnvironmentalLtd (2 are significant) you should be aware of.
If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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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.
About SZSE:002778
Jiangsu Zhongsheng Gaoke EnvironmentalLtd
Jiangsu Zhongsheng Gaoke Environmental Co.,Ltd.
Adequate balance sheet and slightly overvalued.
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