Revenues Not Telling The Story For Shenzhen WOTE Advanced Materials Co.,Ltd (SZSE:002886) After Shares Rise 26%

The Shenzhen WOTE Advanced Materials Co.,Ltd (SZSE:002886) share price has done very well over the last month, posting an excellent gain of 26%. 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.

Following the firm bounce in price, you could be forgiven for thinking Shenzhen WOTE Advanced MaterialsLtd is a stock not worth researching with a price-to-sales ratios (or "P/S") of 3x, 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.

Check out our latest analysis for Shenzhen WOTE Advanced MaterialsLtd

How Has Shenzhen WOTE Advanced MaterialsLtd Performed Recently?

Revenue has risen at a steady rate over the last year for Shenzhen WOTE Advanced MaterialsLtd, which is generally not a bad outcome. It might be that many expect the reasonable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Although there are no analyst estimates available for Shenzhen WOTE Advanced MaterialsLtd, 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 High P/S?

Shenzhen WOTE Advanced MaterialsLtd's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Retrospectively, the last year delivered a decent 4.6% gain to the company's revenues. The solid recent performance means it was also able to grow revenue by 21% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

This is in contrast to the rest of the industry, which is expected to grow by 23% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that Shenzhen WOTE Advanced MaterialsLtd'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 Shenzhen WOTE Advanced MaterialsLtd's P/S Mean For Investors?

Shenzhen WOTE Advanced MaterialsLtd shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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 Shenzhen WOTE Advanced MaterialsLtd revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

You should always think about risks. Case in point, we've spotted 5 warning signs for Shenzhen WOTE Advanced MaterialsLtd you should be aware of, and 1 of them makes us a bit uncomfortable.

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.