There's Reason For Concern Over Zhejiang Yangfan New Materials Co., Ltd.'s (SZSE:300637) Massive 31% Price Jump

Zhejiang Yangfan New Materials Co., Ltd. (SZSE:300637) shares have had a really impressive month, gaining 31% after a shaky period beforehand. Taking a wider view, although not as strong as the last month, the full year gain of 17% is also fairly reasonable.

Following the firm bounce in price, when almost half of the companies in China's Chemicals industry have price-to-sales ratios (or "P/S") below 2x, you may consider Zhejiang Yangfan New Materials as a stock not worth researching with its 4.3x P/S ratio. 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 Zhejiang Yangfan New Materials

How Has Zhejiang Yangfan New Materials Performed Recently?

For instance, Zhejiang Yangfan New Materials' receding revenue in recent times would have to be some food for thought. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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 Zhejiang Yangfan New Materials' earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as steep as Zhejiang Yangfan New Materials' is when the company's growth is on track to outshine the industry decidedly.

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 18%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 6.6% overall rise in revenue. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly 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 Zhejiang Yangfan New Materials' P/S sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. 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 Bottom Line On Zhejiang Yangfan New Materials' P/S

Zhejiang Yangfan New Materials' P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

The fact that Zhejiang Yangfan 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. 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.

It is also worth noting that we have found 3 warning signs for Zhejiang Yangfan New Materials that you need to take into consideration.

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.