There's Reason For Concern Over Guangdong Quanwei Technology Co.,Ltd.'s (SZSE:300716) Massive 36% Price Jump

Despite an already strong run, Guangdong Quanwei Technology Co.,Ltd. (SZSE:300716) shares have been powering on, with a gain of 36% in the last thirty days. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 7.6% in the last twelve months.

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 2.1x, you may consider Guangdong Quanwei TechnologyLtd as a stock probably not worth researching with its 2.9x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

View our latest analysis for Guangdong Quanwei TechnologyLtd

What Does Guangdong Quanwei TechnologyLtd's Recent Performance Look Like?

For example, consider that Guangdong Quanwei TechnologyLtd's financial performance has been poor lately as its revenue has been in decline. 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. However, if this isn't the case, investors might get caught out paying too much for the stock.

Although there are no analyst estimates available for Guangdong Quanwei TechnologyLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Guangdong Quanwei TechnologyLtd?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Guangdong Quanwei TechnologyLtd's to be considered reasonable.

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 52%. The last three years don't look nice either as the company has shrunk revenue by 71% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 21% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Guangdong Quanwei TechnologyLtd's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What Does Guangdong Quanwei TechnologyLtd's P/S Mean For Investors?

Guangdong Quanwei TechnologyLtd's P/S is on the rise since its shares have risen strongly. 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 Guangdong Quanwei TechnologyLtd revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

It is also worth noting that we have found 3 warning signs for Guangdong Quanwei TechnologyLtd that you need to take into consideration.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.