Why Investors Shouldn't Be Surprised By China National Building Material Company Limited's (HKG:3323) 40% Share Price Surge

China National Building Material Company Limited (HKG:3323) shares have had a really impressive month, gaining 40% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 23% in the last twelve months.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about China National Building Material's P/S ratio of 0.1x, since the median price-to-sales (or "P/S") ratio for the Basic Materials industry in Hong Kong is also close to 0.6x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

See our latest analysis for China National Building Material

What Does China National Building Material's P/S Mean For Shareholders?

With revenue that's retreating more than the industry's average of late, China National Building Material has been very sluggish. One possibility is that the P/S is moderate because investors think the company's revenue trend will eventually fall in line with most others in the industry. If you still like the company, you'd want its revenue trajectory to turn around before making any decisions. Or at the very least, you'd be hoping it doesn't keep underperforming if your plan is to pick up some stock while it's not in favour.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on China National Building Material.

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

China National Building Material's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

Retrospectively, the last year delivered a frustrating 15% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 29% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Looking ahead now, revenue is anticipated to climb by 2.2% during the coming year according to the ten analysts following the company. With the industry predicted to deliver 3.9% growth , the company is positioned for a comparable revenue result.

With this in mind, it makes sense that China National Building Material's P/S is closely matching its industry peers. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.

The Key Takeaway

China National Building Material appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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.

A China National Building Material's P/S seems about right to us given the knowledge that analysts are forecasting a revenue outlook that is similar to the Basic Materials industry. At this stage investors feel the potential for an improvement or deterioration in revenue isn't great enough to push P/S in a higher or lower direction. All things considered, if the P/S and revenue estimates contain no major shocks, then it's hard to see the share price moving strongly in either direction in the near future.

Plus, you should also learn about these 3 warning signs we've spotted with China National Building Material (including 1 which doesn't sit too well with us).

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.