What Jinchuan Group International Resources Co. Ltd's (HKG:2362) 36% Share Price Gain Is Not Telling You

Jinchuan Group International Resources Co. Ltd (HKG:2362) shares have continued their recent momentum with a 36% gain in the last month alone. The annual gain comes to 116% following the latest surge, making investors sit up and take notice.

After such a large jump in price, you could be forgiven for thinking Jinchuan Group International Resources is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 2.6x, considering almost half the companies in Hong Kong's Metals and Mining industry have P/S ratios below 0.5x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Jinchuan Group International Resources

How Jinchuan Group International Resources Has Been Performing

As an illustration, revenue has deteriorated at Jinchuan Group International Resources over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

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 Jinchuan Group International Resources' earnings, revenue and cash flow.

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

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Jinchuan Group International Resources' to be considered reasonable.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 28%. Regardless, revenue has managed to lift by a handy 20% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

This is in contrast to the rest of the industry, which is expected to grow by 12% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that Jinchuan Group International Resources' P/S sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

The strong share price surge has lead to Jinchuan Group International Resources' P/S soaring as well. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

The fact that Jinchuan Group International Resources currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

Before you take the next step, you should know about the 2 warning signs for Jinchuan Group International Resources that we have uncovered.

If you're unsure about the strength of Jinchuan Group International Resources' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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.