Subdued Growth No Barrier To Sunlour Pigment Co.,Ltd (SZSE:301036) With Shares Advancing 34%

Sunlour Pigment Co.,Ltd (SZSE:301036) shares have continued their recent momentum with a 34% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 46% in the last year.

Even after such a large jump in price, it's still not a stretch to say that Sunlour PigmentLtd's price-to-sales (or "P/S") ratio of 1.7x right now seems quite "middle-of-the-road" compared to the Chemicals industry in China, where the median P/S ratio is around 2.2x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for Sunlour PigmentLtd

What Does Sunlour PigmentLtd's Recent Performance Look Like?

The revenue growth achieved at Sunlour PigmentLtd over the last year would be more than acceptable for most companies. Perhaps the market is expecting future revenue performance to only keep up with the broader industry, which has keeping the P/S in line with expectations. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

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

Do Revenue Forecasts Match The P/S Ratio?

Sunlour PigmentLtd's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

Taking a look back first, we see that the company grew revenue by an impressive 18% last year. Although, its longer-term performance hasn't been as strong with three-year revenue growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms 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.

With this in mind, we find it intriguing that Sunlour PigmentLtd's P/S is comparable to that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Bottom Line On Sunlour PigmentLtd's P/S

Sunlour PigmentLtd appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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.

We've established that Sunlour PigmentLtd's average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. Right now we are uncomfortable with the P/S as this revenue performance isn't likely to support a more positive sentiment for long. If recent medium-term revenue trends continue, the probability of a share price decline will become quite substantial, placing shareholders at risk.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Sunlour PigmentLtd (2 are a bit concerning) you should be aware of.

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).

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

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.