Risks Still Elevated At These Prices As Jiangsu Zhengdan Chemical Industry Co., Ltd. (SZSE:300641) Shares Dive 28%

Jiangsu Zhengdan Chemical Industry Co., Ltd. (SZSE:300641) shareholders won't be pleased to see that the share price has had a very rough month, dropping 28% and undoing the prior period's positive performance. Regardless, last month's decline is barely a blip on the stock's price chart as it has gained a monstrous 343% in the last year.

In spite of the heavy fall in price, when almost half of the companies in China's Chemicals industry have price-to-sales ratios (or "P/S") below 1.8x, you may still consider Jiangsu Zhengdan Chemical Industry as a stock not worth researching with its 5.7x P/S ratio. 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 Has Jiangsu Zhengdan Chemical Industry Performed Recently?

Jiangsu Zhengdan Chemical Industry certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. The P/S ratio is probably high because investors think this strong revenue growth will be enough to outperform the broader industry in the near future. If not, then existing shareholders might 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 Jiangsu Zhengdan Chemical Industry's earnings, revenue and cash flow.

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

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Jiangsu Zhengdan Chemical Industry's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 33% last year. The latest three year period has also seen an excellent 39% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 23% shows it's noticeably less attractive.

In light of this, it's alarming that Jiangsu Zhengdan Chemical Industry's 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. 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 Final Word

A significant share price dive has done very little to deflate Jiangsu Zhengdan Chemical Industry's very lofty P/S. 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 Jiangsu Zhengdan Chemical Industry 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 observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. 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.

Having said that, be aware Jiangsu Zhengdan Chemical Industry is showing 3 warning signs in our investment analysis, and 2 of those don't sit too well with us.

If you're unsure about the strength of Jiangsu Zhengdan Chemical Industry'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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com