Shandong Fengyuan Chemical Co., Ltd.'s (SZSE:002805) Shares Leap 34% Yet They're Still Not Telling The Full Story

Those holding Shandong Fengyuan Chemical Co., Ltd. (SZSE:002805) shares would be relieved that the share price has rebounded 34% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 36% in the last twelve months.

In spite of the firm bounce in price, Shandong Fengyuan Chemical may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 1.5x, since almost half of all companies in the Chemicals industry in China have P/S ratios greater than 2.2x and even P/S higher than 5x are not unusual. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Shandong Fengyuan Chemical

How Has Shandong Fengyuan Chemical Performed Recently?

With revenue growth that's exceedingly strong of late, Shandong Fengyuan Chemical has been doing very well. One possibility is that the P/S ratio is low because investors think this strong revenue growth might actually underperform the broader industry in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Although there are no analyst estimates available for Shandong Fengyuan Chemical, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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

Shandong Fengyuan Chemical's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

Retrospectively, the last year delivered an exceptional 93% gain to the company's top line. This great performance means it was also able to deliver immense revenue growth over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

When compared to the industry's one-year growth forecast of 21%, the most recent medium-term revenue trajectory is noticeably more alluring

In light of this, it's peculiar that Shandong Fengyuan Chemical's P/S sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.

What Does Shandong Fengyuan Chemical's P/S Mean For Investors?

Shandong Fengyuan Chemical's stock price has surged recently, but its but its P/S still remains modest. 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 Shandong Fengyuan Chemical revealed its three-year revenue trends aren't boosting its P/S anywhere near as much as we would have predicted, given they look better than current industry expectations. When we see strong revenue with faster-than-industry growth, we assume there are some significant underlying risks to the company's ability to make money which is applying downwards pressure on the P/S ratio. It appears many are indeed anticipating revenue instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

You should always think about risks. Case in point, we've spotted 2 warning signs for Shandong Fengyuan Chemical you should be aware of, and 1 of them can't be ignored.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.