Revenues Tell The Story For China Shengmu Organic Milk Limited (HKG:1432) As Its Stock Soars 31%

China Shengmu Organic Milk Limited (HKG:1432) shares have had a really impressive month, gaining 31% after a shaky period beforehand. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 8.5% over the last year.

Although its price has surged higher, it's still not a stretch to say that China Shengmu Organic Milk's price-to-sales (or "P/S") ratio of 0.5x right now seems quite "middle-of-the-road" compared to the Food industry in Hong Kong, seeing as it matches the P/S ratio of the wider industry. 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 China Shengmu Organic Milk

How China Shengmu Organic Milk Has Been Performing

China Shengmu Organic Milk has been doing a decent job lately as it's been growing revenue at a reasonable pace. One possibility is that the P/S is moderate because investors think this good revenue growth might only be parallel to the broader industry in the near future. Those who are bullish on China Shengmu Organic Milk will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

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

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

The only time you'd be comfortable seeing a P/S like China Shengmu Organic Milk's is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered a decent 3.7% gain to the company's revenues. The latest three year period has also seen a 16% overall rise in revenue, aided somewhat by its short-term performance. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Weighing that recent medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 5.6% shows it's about the same on an annualised basis.

With this in consideration, it's clear to see why China Shengmu Organic Milk's P/S matches up closely to its industry peers. It seems most investors are expecting to see average growth rates continue into the future and are only willing to pay a moderate amount for the stock.

The Final Word

China Shengmu Organic Milk's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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.

As we've seen, China Shengmu Organic Milk's three-year revenue trends seem to be contributing to its P/S, given they look similar to current industry expectations. Right now shareholders are comfortable with the P/S as they are quite confident future revenue won't throw up any surprises. Given the current circumstances, it seems improbable that the share price will experience any significant movement in either direction in the near future if recent medium-term revenue trends persist.

You should always think about risks. Case in point, we've spotted 1 warning sign for China Shengmu Organic Milk you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.