What Shenzhen RongDa Photosensitive Science & Technology Co., Ltd.'s (SZSE:300576) 26% Share Price Gain Is Not Telling You

Those holding Shenzhen RongDa Photosensitive Science & Technology Co., Ltd. (SZSE:300576) shares would be relieved that the share price has rebounded 26% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. The last 30 days bring the annual gain to a very sharp 91%.

Following the firm bounce in price, you could be forgiven for thinking Shenzhen RongDa Photosensitive Science & Technology is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 12.7x, considering almost half the companies in China's Chemicals industry have P/S ratios below 1.9x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Shenzhen RongDa Photosensitive Science & Technology

What Does Shenzhen RongDa Photosensitive Science & Technology's P/S Mean For Shareholders?

It looks like revenue growth has deserted Shenzhen RongDa Photosensitive Science & Technology recently, which is not something to boast about. It might be that many are expecting an improvement to the uninspiring revenue performance over the coming period, which has kept the P/S from collapsing. 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 RongDa Photosensitive Science & Technology, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Shenzhen RongDa Photosensitive Science & Technology?

The only time you'd be truly comfortable seeing a P/S as steep as Shenzhen RongDa Photosensitive Science & Technology's is when the company's growth is on track to outshine the industry decidedly.

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. Still, the latest three year period has seen an excellent 52% overall rise in revenue, in spite of its uninspiring short-term performance. Therefore, it's fair to say the revenue growth recently has been great for the company, but investors will want to ask why it has slowed to such an extent.

This is in contrast to the rest of the industry, which is expected to grow by 26% 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 RongDa Photosensitive Science & Technology'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 good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Key Takeaway

Shares in Shenzhen RongDa Photosensitive Science & Technology have seen a strong upwards swing lately, which has really helped boost its P/S figure. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

The fact that Shenzhen RongDa Photosensitive Science & Technology currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. 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 3 warning signs for Shenzhen RongDa Photosensitive Science & Technology you should be aware of, and 1 of them is significant.

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.