What Yingkou Fengguang Advanced Material Co.,Ltd's (SZSE:301100) 45% Share Price Gain Is Not Telling You

Yingkou Fengguang Advanced Material Co.,Ltd (SZSE:301100) shares have continued their recent momentum with a 45% gain in the last month alone. Taking a wider view, although not as strong as the last month, the full year gain of 16% is also fairly reasonable.

Following the firm bounce in price, you could be forgiven for thinking Yingkou Fengguang Advanced MaterialLtd is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 4.7x, considering almost half the companies in China's Chemicals industry have P/S ratios below 2.3x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for Yingkou Fengguang Advanced MaterialLtd

What Does Yingkou Fengguang Advanced MaterialLtd's P/S Mean For Shareholders?

Yingkou Fengguang Advanced MaterialLtd has been doing a good job lately as it's been growing revenue at a solid pace. Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Yingkou Fengguang Advanced MaterialLtd will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For Yingkou Fengguang Advanced MaterialLtd?

In order to justify its P/S ratio, Yingkou Fengguang Advanced MaterialLtd would need to produce outstanding growth that's well in excess of the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 25%. Revenue has also lifted 26% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 24% shows it's noticeably less attractive.

With this information, we find it concerning that Yingkou Fengguang Advanced MaterialLtd is trading at a P/S higher than the industry. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What We Can Learn From Yingkou Fengguang Advanced MaterialLtd's P/S?

The strong share price surge has lead to Yingkou Fengguang Advanced MaterialLtd's P/S soaring as well. 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 Yingkou Fengguang Advanced 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. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It is also worth noting that we have found 2 warning signs for Yingkou Fengguang Advanced MaterialLtd (1 is a bit unpleasant!) that you need to take into consideration.

If you're unsure about the strength of Yingkou Fengguang Advanced MaterialLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.