Revenues Not Telling The Story For Zhejiang Realsun Chemical Co.,Ltd. (SZSE:301212) After Shares Rise 27%

Zhejiang Realsun Chemical Co.,Ltd. (SZSE:301212) shares have continued their recent momentum with a 27% gain in the last month alone. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 24% over that time.

After such a large jump in price, given around half the companies in China's Chemicals industry have price-to-sales ratios (or "P/S") below 2.2x, you may consider Zhejiang Realsun ChemicalLtd as a stock to avoid entirely with its 4.9x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for Zhejiang Realsun ChemicalLtd

What Does Zhejiang Realsun ChemicalLtd's P/S Mean For Shareholders?

For instance, Zhejiang Realsun ChemicalLtd's receding revenue in recent times would have to be some food for thought. 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.

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

Is There Enough Revenue Growth Forecasted For Zhejiang Realsun ChemicalLtd?

Zhejiang Realsun ChemicalLtd's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered a frustrating 47% decrease to the company's top line. As a result, revenue from three years ago have also fallen 22% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 23% shows it's an unpleasant look.

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. 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.

The Final Word

The strong share price surge has lead to Zhejiang Realsun ChemicalLtd's P/S soaring as well. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

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. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. 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.

We don't want to rain on the parade too much, but we did also find 4 warning signs for Zhejiang Realsun ChemicalLtd (1 can't be ignored!) that you need to be mindful of.

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.