Revenues Not Telling The Story For Dongyue Group Limited (HKG:189) After Shares Rise 27%

Despite an already strong run, Dongyue Group Limited (HKG:189) shares have been powering on, with a gain of 27% in the last thirty days. Looking further back, the 12% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Since its price has surged higher, when almost half of the companies in Hong Kong's Chemicals industry have price-to-sales ratios (or "P/S") below 0.4x, you may consider Dongyue Group as a stock probably not worth researching with its 1x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

Check out our latest analysis for Dongyue Group

What Does Dongyue Group's Recent Performance Look Like?

Dongyue Group hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Keen to find out how analysts think Dongyue Group's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Dongyue Group's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as high as Dongyue Group's is when the company's growth is on track to outshine the industry.

Retrospectively, the last year delivered a frustrating 28% decrease to the company's top line. Still, the latest three year period has seen an excellent 44% overall rise in revenue, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Turning to the outlook, the next three years should generate growth of 21% each year as estimated by the four analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 28% per year, which is noticeably more attractive.

With this information, we find it concerning that Dongyue Group is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. 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 growth outlook.

The Bottom Line On Dongyue Group's P/S

Dongyue Group's P/S is on the rise since its shares have risen strongly. 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.

It comes as a surprise to see Dongyue Group trade at such a high P/S given the revenue forecasts look less than stellar. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. At these price levels, investors should remain cautious, particularly if things don't improve.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Dongyue Group you should know about.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.