Subdued Growth No Barrier To Shandong Tongda Island New Materials Co.,Ltd. (SZSE:300321) With Shares Advancing 29%

The Shandong Tongda Island New Materials Co.,Ltd. (SZSE:300321) share price has done very well over the last month, posting an excellent gain of 29%. Notwithstanding the latest gain, the annual share price return of 9.2% isn't as impressive.

Following the firm bounce in price, given around half the companies in China's Chemicals industry have price-to-sales ratios (or "P/S") below 2.3x, you may consider Shandong Tongda Island New MaterialsLtd as a stock to avoid entirely with its 4.8x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Shandong Tongda Island New MaterialsLtd

What Does Shandong Tongda Island New MaterialsLtd's Recent Performance Look Like?

The revenue growth achieved at Shandong Tongda Island New MaterialsLtd over the last year would be more than acceptable for most companies. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Shandong Tongda Island New MaterialsLtd's to be considered reasonable.

Retrospectively, the last year delivered a decent 9.3% gain to the company's revenues. However, this wasn't enough as the latest three year period has seen an unpleasant 25% overall drop in revenue. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 22% shows it's an unpleasant look.

In light of this, it's alarming that Shandong Tongda Island New 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. 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.

What Does Shandong Tongda Island New MaterialsLtd's P/S Mean For Investors?

The strong share price surge has lead to Shandong Tongda Island New MaterialsLtd's P/S soaring as well. 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.

Our examination of Shandong Tongda Island New MaterialsLtd revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. 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. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Shandong Tongda Island New MaterialsLtd (at least 1 which is a bit concerning), and understanding these should be part of your investment process.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.