What Xinjiang Daqo New Energy Co.,Ltd.'s (SHSE:688303) 27% Share Price Gain Is Not Telling You

Xinjiang Daqo New Energy Co.,Ltd. (SHSE:688303) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 45% over that time.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about Xinjiang Daqo New EnergyLtd's P/S ratio of 4.1x, since the median price-to-sales (or "P/S") ratio for the Semiconductor industry in China is also close to 5.1x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Check out our latest analysis for Xinjiang Daqo New EnergyLtd

What Does Xinjiang Daqo New EnergyLtd's Recent Performance Look Like?

Xinjiang Daqo New EnergyLtd could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. One possibility is that the P/S ratio is moderate because investors think this poor revenue performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

Want the full picture on analyst estimates for the company? Then our free report on Xinjiang Daqo New EnergyLtd will help you uncover what's on the horizon.

Is There Some Revenue Growth Forecasted For Xinjiang Daqo New EnergyLtd?

The only time you'd be comfortable seeing a P/S like Xinjiang Daqo New EnergyLtd's is when the company's growth is tracking the industry closely.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 52%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 64% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Turning to the outlook, the next year should bring diminished returns, with revenue decreasing 4.6% as estimated by the seven analysts watching the company. That's not great when the rest of the industry is expected to grow by 36%.

With this information, we find it concerning that Xinjiang Daqo New EnergyLtd is trading at a fairly similar P/S compared to the industry. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the negative growth outlook.

The Bottom Line On Xinjiang Daqo New EnergyLtd's P/S

Xinjiang Daqo New EnergyLtd appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

While Xinjiang Daqo New EnergyLtd's P/S isn't anything out of the ordinary for companies in the industry, we didn't expect it given forecasts of revenue decline. With this in mind, we don't feel the current P/S is justified as declining revenues are unlikely to support a more positive sentiment for long. If the poor revenue outlook tells us one thing, it's that these current price levels could be unsustainable.

Plus, you should also learn about these 3 warning signs we've spotted with Xinjiang Daqo New EnergyLtd (including 1 which shouldn't be ignored).

If these risks are making you reconsider your opinion on Xinjiang Daqo New EnergyLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.