Malion New Materials Co., Ltd.'s (SZSE:300586) Shares Climb 42% But Its Business Is Yet to Catch Up

The Malion New Materials Co., Ltd. (SZSE:300586) share price has done very well over the last month, posting an excellent gain of 42%. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 14% in the last twelve months.

After such a large jump in price, you could be forgiven for thinking Malion New Materials is a stock not worth researching with a price-to-sales ratios (or "P/S") of 3.5x, considering almost half the companies in China's Chemicals industry have P/S ratios below 2.2x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

See our latest analysis for Malion New Materials

What Does Malion New Materials' Recent Performance Look Like?

For example, consider that Malion New Materials' financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Malion New Materials' earnings, revenue and cash flow.

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

In order to justify its P/S ratio, Malion New Materials would need to produce impressive growth in excess of the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 17%. Regardless, revenue has managed to lift by a handy 9.7% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 21% shows it's noticeably less attractive.

In light of this, it's alarming that Malion New Materials' 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.

The Final Word

Malion New Materials shares have taken a big step in a northerly direction, but its P/S is elevated as a result. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

The fact that Malion New Materials 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. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Having said that, be aware Malion New Materials is showing 1 warning sign in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on Malion New Materials, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.