Kunming Chuan Jin Nuo Chemical Co., Ltd. (SZSE:300505) shares have had a really impressive month, gaining 29% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 29% in the last twelve months.

Although its price has surged higher, you could still be forgiven for feeling indifferent about Kunming Chuan Jin Nuo Chemical's P/S ratio of 1.4x, since the median price-to-sales (or "P/S") ratio for the Food industry in China is also close to 1.6x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

What Does Kunming Chuan Jin Nuo Chemical's Recent Performance Look Like?

The revenue growth achieved at Kunming Chuan Jin Nuo Chemical over the last year would be more than acceptable for most companies. One possibility is that the P/S is moderate because investors think this respectable revenue growth might not be enough to outperform the broader industry in the near future. Those who are bullish on Kunming Chuan Jin Nuo Chemical will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Do Revenue Forecasts Match The P/S Ratio?

In order to justify its P/S ratio, Kunming Chuan Jin Nuo Chemical would need to produce growth that's similar to the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 7.7%. Pleasingly, revenue has also lifted 158% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

This is in contrast to the rest of the industry, which is expected to grow by 15% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's curious that Kunming Chuan Jin Nuo Chemical's P/S sits in line with the majority of other companies. It may be that most investors are not convinced the company can maintain its recent growth rates.

The Bottom Line On Kunming Chuan Jin Nuo Chemical's P/S

Kunming Chuan Jin Nuo Chemical's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We didn't quite envision Kunming Chuan Jin Nuo Chemical's P/S sitting in line with the wider industry, considering the revenue growth over the last three-year is higher than the current industry outlook. When we see strong revenue with faster-than-industry growth, we can only assume potential risks are what might be placing pressure on the P/S ratio. At least the risk of a price drop looks to be subdued if recent medium-term revenue trends continue, but investors seem to think future revenue could see some volatility.

You need to take note of risks, for example - Kunming Chuan Jin Nuo Chemical has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

If you're unsure about the strength of Kunming Chuan Jin Nuo Chemical's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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