Optimistic Investors Push Zhejiang Realsun Chemical Co.,Ltd. (SZSE:301212) Shares Up 33% But Growth Is Lacking

The Zhejiang Realsun Chemical Co.,Ltd. (SZSE:301212) share price has done very well over the last month, posting an excellent gain of 33%. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 9.5% in the last twelve months.

Since its price has surged higher, you could be forgiven for thinking Zhejiang Realsun ChemicalLtd is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 5x, considering almost half the companies in China's Chemicals industry have P/S ratios below 2.4x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Zhejiang Realsun ChemicalLtd

What Does Zhejiang Realsun ChemicalLtd's Recent Performance Look Like?

For example, consider that Zhejiang Realsun ChemicalLtd's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is high because investors think the company will still do 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.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Zhejiang Realsun ChemicalLtd's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Zhejiang Realsun ChemicalLtd?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Zhejiang Realsun ChemicalLtd's to be considered reasonable.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 27%. This means it has also seen a slide in revenue over the longer-term as revenue is down 25% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 26% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Zhejiang Realsun ChemicalLtd's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Key Takeaway

Zhejiang Realsun ChemicalLtd's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

We've established that Zhejiang Realsun ChemicalLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

You need to take note of risks, for example - Zhejiang Realsun ChemicalLtd has 3 warning signs (and 2 which are concerning) we think you should know about.

If you're unsure about the strength of Zhejiang Realsun ChemicalLtd'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.