Subdued Growth No Barrier To Shenzhen Cotran New Material Co.,Ltd. (SZSE:300731) With Shares Advancing 26%

The Shenzhen Cotran New Material Co.,Ltd. (SZSE:300731) share price has done very well over the last month, posting an excellent gain of 26%. Unfortunately, despite the strong performance over the last month, the full year gain of 5.3% isn't as attractive.

Since its price has surged higher, 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 Shenzhen Cotran New MaterialLtd as a stock probably not worth researching with its 3.9x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Shenzhen Cotran New MaterialLtd

What Does Shenzhen Cotran New MaterialLtd's P/S Mean For Shareholders?

The revenue growth achieved at Shenzhen Cotran New MaterialLtd over the last year would be more than acceptable for most companies. One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be enough to outperform the broader industry in the near future. 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 Shenzhen Cotran New MaterialLtd'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 outperform the industry for P/S ratios like Shenzhen Cotran New MaterialLtd's to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 23%. The strong recent performance means it was also able to grow revenue by 56% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

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 Shenzhen Cotran New MaterialLtd's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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 Key Takeaway

Shenzhen Cotran New MaterialLtd shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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 examination of Shenzhen Cotran New MaterialLtd 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

It is also worth noting that we have found 2 warning signs for Shenzhen Cotran New MaterialLtd that you need to take into consideration.

If these risks are making you reconsider your opinion on Shenzhen Cotran New MaterialLtd, 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.