Subdued Growth No Barrier To Dongguan Golden Sun Abrasives Co.,Ltd (SZSE:300606) With Shares Advancing 38%

Dongguan Golden Sun Abrasives Co.,Ltd (SZSE:300606) shareholders are no doubt pleased to see that the share price has bounced 38% in the last month, although it is still struggling to make up recently lost ground. The last 30 days bring the annual gain to a very sharp 65%.

Since its price has surged higher, you could be forgiven for thinking Dongguan Golden Sun AbrasivesLtd is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 6.2x, considering almost half the companies in China's Forestry industry have P/S ratios below 1.5x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

See our latest analysis for Dongguan Golden Sun AbrasivesLtd

How Has Dongguan Golden Sun AbrasivesLtd Performed Recently?

The revenue growth achieved at Dongguan Golden Sun AbrasivesLtd over the last year would be more than acceptable for most companies. Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up. If not, then existing shareholders may be a little 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 Dongguan Golden Sun AbrasivesLtd's earnings, revenue and cash flow.

How Is Dongguan Golden Sun AbrasivesLtd's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Dongguan Golden Sun AbrasivesLtd's is when the company's growth is on track to outshine the industry decidedly.

Taking a look back first, we see that the company managed to grow revenues by a handy 11% last year. The solid recent performance means it was also able to grow revenue by 18% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 14% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this information, we find it concerning that Dongguan Golden Sun AbrasivesLtd is trading at a P/S higher than the industry. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. 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.

What We Can Learn From Dongguan Golden Sun AbrasivesLtd's P/S?

Shares in Dongguan Golden Sun AbrasivesLtd have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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 Dongguan Golden Sun AbrasivesLtd 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 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 Dongguan Golden Sun AbrasivesLtd is showing 4 warning signs in our investment analysis, and 3 of those shouldn't be ignored.

If you're unsure about the strength of Dongguan Golden Sun AbrasivesLtd'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.