There's Reason For Concern Over Fujian Dongbai (Group) Co.,Ltd.'s (SHSE:600693) Massive 28% Price Jump

Despite an already strong run, Fujian Dongbai (Group) Co.,Ltd. (SHSE:600693) shares have been powering on, with a gain of 28% in the last thirty days. The last 30 days bring the annual gain to a very sharp 68%.

Following the firm bounce in price, you could be forgiven for thinking Fujian Dongbai (Group)Ltd is a stock not worth researching with a price-to-sales ratios (or "P/S") of 3.2x, considering almost half the companies in China's Multiline Retail industry have P/S ratios below 2x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

View our latest analysis for Fujian Dongbai (Group)Ltd

How Fujian Dongbai (Group)Ltd Has Been Performing

For example, consider that Fujian Dongbai (Group)Ltd's financial performance has been pretty ordinary lately as revenue growth is non-existent. Perhaps the market believes that revenue growth will improve markedly over current levels, inflating the P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

Although there are no analyst estimates available for Fujian Dongbai (Group)Ltd, 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 Fujian Dongbai (Group)Ltd?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Fujian Dongbai (Group)Ltd's to be considered reasonable.

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. This isn't what shareholders were looking for as it means they've been left with a 8.4% decline in revenue over the last three years in total. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 9.3% shows it's an unpleasant look.

In light of this, it's alarming that Fujian Dongbai (Group)Ltd's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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 Does Fujian Dongbai (Group)Ltd's P/S Mean For Investors?

The large bounce in Fujian Dongbai (Group)Ltd's shares has lifted the company's P/S handsomely. 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.

We've established that Fujian Dongbai (Group)Ltd 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.

There are also other vital risk factors to consider and we've discovered 4 warning signs for Fujian Dongbai (Group)Ltd (3 are a bit unpleasant!) that you should be aware of before investing here.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.