NanJing Sanchao Advanced Materials Co.,Ltd. (SZSE:300554) Stock Rockets 47% As Investors Are Less Pessimistic Than Expected

NanJing Sanchao Advanced Materials Co.,Ltd. (SZSE:300554) shareholders would be excited to see that the share price has had a great month, posting a 47% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 46% in the last year.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about NanJing Sanchao Advanced MaterialsLtd's P/S ratio of 6.5x, since the median price-to-sales (or "P/S") ratio for the Semiconductor industry in China is also close to 6.2x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Check out our latest analysis for NanJing Sanchao Advanced MaterialsLtd

What Does NanJing Sanchao Advanced MaterialsLtd's Recent Performance Look Like?

The revenue growth achieved at NanJing Sanchao Advanced MaterialsLtd over the last year would be more than acceptable for most companies. It might be that many expect the respectable revenue performance to wane, which has kept the P/S from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

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

What Are Revenue Growth Metrics Telling Us About The P/S?

There's an inherent assumption that a company should be matching the industry for P/S ratios like NanJing Sanchao Advanced MaterialsLtd's to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 8.5% last year. This was backed up an excellent period prior to see revenue up by 87% in total over the last three years. 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 36% shows it's noticeably less attractive.

With this information, we find it interesting that NanJing Sanchao Advanced MaterialsLtd is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

The Final Word

NanJing Sanchao Advanced MaterialsLtd's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that NanJing Sanchao Advanced MaterialsLtd's average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. Unless the recent medium-term conditions improve, it's hard to accept the current share price as fair value.

Before you settle on your opinion, we've discovered 3 warning signs for NanJing Sanchao Advanced MaterialsLtd (1 makes us a bit uncomfortable!) that you should be aware of.

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.