Revenues Not Telling The Story For Jiujiang Shanshui Technology Co.,Ltd (SZSE:301190)

Jiujiang Shanshui Technology Co.,Ltd's (SZSE:301190) price-to-sales (or "P/S") ratio of 6.6x may look like a poor investment opportunity when you consider close to half the companies in the Chemicals industry in China have P/S ratios below 2.1x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

Check out our latest analysis for Jiujiang Shanshui TechnologyLtd

What Does Jiujiang Shanshui TechnologyLtd's Recent Performance Look Like?

With revenue growth that's exceedingly strong of late, Jiujiang Shanshui TechnologyLtd has been doing very well. The P/S ratio is probably high because investors think this strong 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.

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

Is There Enough Revenue Growth Forecasted For Jiujiang Shanshui TechnologyLtd?

In order to justify its P/S ratio, Jiujiang Shanshui TechnologyLtd would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered an exceptional 36% gain to the company's top line. Pleasingly, revenue has also lifted 30% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 23% shows it's noticeably less attractive.

In light of this, it's alarming that Jiujiang Shanshui TechnologyLtd's P/S sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates 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.

What We Can Learn From Jiujiang Shanshui TechnologyLtd's P/S?

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 Jiujiang Shanshui TechnologyLtd 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 observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with Jiujiang Shanshui TechnologyLtd (at least 2 which are a bit unpleasant), and understanding these should be part of your investment process.

If these risks are making you reconsider your opinion on Jiujiang Shanshui TechnologyLtd, 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.