Investors Appear Satisfied With Shenzhen WOTE Advanced Materials Co.,Ltd's (SZSE:002886) Prospects As Shares Rocket 27%

Despite an already strong run, Shenzhen WOTE Advanced Materials Co.,Ltd (SZSE:002886) shares have been powering on, with a gain of 27% in the last thirty days. Looking further back, the 10% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

After such a large jump in price, given close to half the companies operating in China's Chemicals industry have price-to-sales ratios (or "P/S") below 2.5x, you may consider Shenzhen WOTE Advanced MaterialsLtd as a stock to potentially avoid with its 3.1x 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 WOTE Advanced MaterialsLtd

What Does Shenzhen WOTE Advanced MaterialsLtd's P/S Mean For Shareholders?

Shenzhen WOTE Advanced MaterialsLtd certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on analyst estimates for the company? Then our free report on Shenzhen WOTE Advanced MaterialsLtd will help you uncover what's on the horizon.

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

There's an inherent assumption that a company should outperform the industry for P/S ratios like Shenzhen WOTE Advanced MaterialsLtd's to be considered reasonable.

If we review the last year of revenue growth, the company posted a worthy increase of 14%. The solid recent performance means it was also able to grow revenue by 13% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 49% as estimated by the lone analyst watching the company. That's shaping up to be materially higher than the 25% growth forecast for the broader industry.

With this in mind, it's not hard to understand why Shenzhen WOTE Advanced MaterialsLtd's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

Shenzhen WOTE Advanced 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.

As we suspected, our examination of Shenzhen WOTE Advanced MaterialsLtd's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Shenzhen WOTE Advanced MaterialsLtd (of which 1 is a bit unpleasant!) you should know about.

If you're unsure about the strength of Shenzhen WOTE Advanced MaterialsLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.