Henan Jinyuan Hydrogenated Chemicals Co., Ltd. (HKG:2502) Soars 30% But It's A Story Of Risk Vs Reward

Henan Jinyuan Hydrogenated Chemicals Co., Ltd. (HKG:2502) shares have continued their recent momentum with a 30% gain in the last month alone. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 24% over that time.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Henan Jinyuan Hydrogenated Chemicals' P/S ratio of 0.1x, since the median price-to-sales (or "P/S") ratio for the Chemicals industry in Hong Kong is also close to 0.5x. 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.

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View our latest analysis for Henan Jinyuan Hydrogenated Chemicals

How Has Henan Jinyuan Hydrogenated Chemicals Performed Recently?

With revenue growth that's exceedingly strong of late, Henan Jinyuan Hydrogenated Chemicals has been doing very well. It might be that many expect the strong revenue performance to wane, which has kept the share price, and thus the P/S ratio, from rising. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Although there are no analyst estimates available for Henan Jinyuan Hydrogenated Chemicals, 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?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Henan Jinyuan Hydrogenated Chemicals' to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 33% last year. The latest three year period has also seen an excellent 110% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Comparing that recent medium-term revenue trajectory with the industry's one-year growth forecast of 3.4% shows it's noticeably more attractive.

With this information, we find it interesting that Henan Jinyuan Hydrogenated Chemicals is trading at a fairly similar P/S compared to the industry. Apparently some shareholders believe the recent performance is at its limits and have been accepting lower selling prices.

The Final Word

Henan Jinyuan Hydrogenated Chemicals appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in 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.

We've established that Henan Jinyuan Hydrogenated Chemicals currently trades on a lower than expected P/S since its recent three-year growth is higher than the wider industry forecast. It'd be fair to assume that potential risks the company faces could be the contributing factor to the lower than expected P/S. It appears some are indeed anticipating revenue instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Henan Jinyuan Hydrogenated Chemicals (1 can't be ignored) 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.