Jiangsu Zhengdan Chemical Industry Co., Ltd.'s (SZSE:300641) 30% Price Boost Is Out Of Tune With Revenues

Jiangsu Zhengdan Chemical Industry Co., Ltd. (SZSE:300641) shareholders would be excited to see that the share price has had a great month, posting a 30% gain and recovering from prior weakness. This latest share price bounce rounds out a remarkable 424% gain over the last twelve months.

After such a large jump in price, you could be forgiven for thinking Jiangsu Zhengdan Chemical Industry is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 5.1x, considering almost half the companies in China's Chemicals industry have P/S ratios below 2.2x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for Jiangsu Zhengdan Chemical Industry

How Jiangsu Zhengdan Chemical Industry Has Been Performing

Jiangsu Zhengdan Chemical Industry certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. It seems that many are expecting the strong 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.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Jiangsu Zhengdan Chemical Industry will help you shine a light on its historical performance.

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as steep as Jiangsu Zhengdan Chemical Industry's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered an exceptional 96% gain to the company's top line. The latest three year period has also seen an excellent 84% overall rise in revenue, aided by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Comparing that to the industry, which is predicted to deliver 25% growth in the next 12 months, the company's momentum is pretty similar based on recent medium-term annualised revenue results.

With this information, we find it interesting that Jiangsu Zhengdan Chemical Industry is trading at a high P/S compared to the industry. Apparently many investors in the company are more bullish than recent times would indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as a continuation of recent revenue trends would weigh down the share price eventually.

The Final Word

Shares in Jiangsu Zhengdan Chemical Industry have seen a strong upwards swing lately, which has really helped boost its P/S figure. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our look into Jiangsu Zhengdan Chemical Industry has shown that it currently trades on a higher than expected P/S since its recent three-year growth is only in line with the wider industry forecast. When we see average revenue with industry-like growth combined with a high P/S, we suspect the share price is at risk of declining, bringing the P/S back in line with the industry too. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you settle on your opinion, we've discovered 3 warning signs for Jiangsu Zhengdan Chemical Industry (1 is a bit unpleasant!) that you should be aware of.

If these risks are making you reconsider your opinion on Jiangsu Zhengdan Chemical Industry, 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.