China Carbon Neutral Development Group Limited's (HKG:1372) 25% Price Boost Is Out Of Tune With Revenues

Despite an already strong run, China Carbon Neutral Development Group Limited (HKG:1372) shares have been powering on, with a gain of 25% in the last thirty days. This latest share price bounce rounds out a remarkable 305% gain over the last twelve months.

After such a large jump in price, you could be forgiven for thinking China Carbon Neutral Development Group is a stock not worth researching with a price-to-sales ratios (or "P/S") of 1.4x, considering almost half the companies in Hong Kong's Construction industry have P/S ratios below 0.3x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

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See our latest analysis for China Carbon Neutral Development Group

What Does China Carbon Neutral Development Group's P/S Mean For Shareholders?

The revenue growth achieved at China Carbon Neutral Development Group over the last year would be more than acceptable for most companies. Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up. However, if this isn't the case, investors might get caught out paying too much for the stock.

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 China Carbon Neutral Development Group's earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should outperform the industry for P/S ratios like China Carbon Neutral Development Group's to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 18%. Pleasingly, revenue has also lifted 60% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Weighing that recent medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 16% shows it's about the same on an annualised basis.

In light of this, it's curious that China Carbon Neutral Development Group's P/S sits above the majority of other companies. Apparently many investors in the company are more bullish than recent times would indicate and aren't willing to let go of their stock right now. Nevertheless, they may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What Does China Carbon Neutral Development Group's P/S Mean For Investors?

China Carbon Neutral Development Group's P/S is on the rise since its shares have risen strongly. 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.

Our examination of China Carbon Neutral Development Group revealed its three-year revenue trends aren't impacting its high P/S as much as we would have predicted, given they look similar to current industry expectations. When we see average revenue with industry-like growth combined with a high P/S, we suspect the share price is at risk of declining, bringing the P/S back in line with the industry too. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Having said that, be aware China Carbon Neutral Development Group is showing 3 warning signs in our investment analysis, and 2 of those are significant.

If you're unsure about the strength of China Carbon Neutral Development Group'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.