Guangdong Kitech New Material Holding Co.,Ltd.'s (SZSE:300995) 34% Price Boost Is Out Of Tune With Revenues

Those holding Guangdong Kitech New Material Holding Co.,Ltd. (SZSE:300995) shares would be relieved that the share price has rebounded 34% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 3.9% over the last year.

After such a large jump in price, given around half the companies in China's Chemicals industry have price-to-sales ratios (or "P/S") below 2.2x, you may consider Guangdong Kitech New Material HoldingLtd as a stock to avoid entirely with its 5.9x 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.

View our latest analysis for Guangdong Kitech New Material HoldingLtd

How Has Guangdong Kitech New Material HoldingLtd Performed Recently?

The revenue growth achieved at Guangdong Kitech New Material HoldingLtd over the last year would be more than acceptable for most companies. It might be that many expect the respectable 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.

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

How Is Guangdong Kitech New Material HoldingLtd's Revenue Growth Trending?

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

Retrospectively, the last year delivered a decent 10% gain to the company's revenues. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 21% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 20% shows it's an unpleasant look.

With this information, we find it concerning that Guangdong Kitech New Material HoldingLtd is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate 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 Guangdong Kitech New Material HoldingLtd's P/S

Shares in Guangdong Kitech New Material HoldingLtd have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

We've established that Guangdong Kitech New Material HoldingLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Having said that, be aware Guangdong Kitech New Material HoldingLtd is showing 4 warning signs in our investment analysis, and 3 of those can't be ignored.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.