Shanghai Baolijia Chemical Co., Ltd.'s (SZSE:301037) Share Price Boosted 27% But Its Business Prospects Need A Lift Too

Shanghai Baolijia Chemical Co., Ltd. (SZSE:301037) shares have had a really impressive month, gaining 27% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 43%.

Although its price has surged higher, Shanghai Baolijia Chemical's price-to-sales (or "P/S") ratio of 0.8x might still make it look like a buy right now compared to the Chemicals industry in China, where around half of the companies have P/S ratios above 2.4x and even P/S above 5x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

Check out our latest analysis for Shanghai Baolijia Chemical

What Does Shanghai Baolijia Chemical's Recent Performance Look Like?

For example, consider that Shanghai Baolijia Chemical's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

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

Is There Any Revenue Growth Forecasted For Shanghai Baolijia Chemical?

In order to justify its P/S ratio, Shanghai Baolijia Chemical would need to produce sluggish growth that's trailing the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 9.9%. This means it has also seen a slide in revenue over the longer-term as revenue is down 30% in total over the last three years. 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 25% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we understand why Shanghai Baolijia Chemical's P/S is lower than most of its industry peers. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

What We Can Learn From Shanghai Baolijia Chemical's P/S?

Shanghai Baolijia Chemical's stock price has surged recently, but its but its P/S still remains modest. 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.

As we suspected, our examination of Shanghai Baolijia Chemical revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Given the current circumstances, it seems unlikely that the share price will experience any significant movement in either direction in the near future if recent medium-term revenue trends persist.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Shanghai Baolijia Chemical that you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.