The Jiangxi Hungpai New Material Co., Ltd. (SHSE:605366) share price has done very well over the last month, posting an excellent gain of 26%. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 16% over that time.

After such a large jump in price, you could be forgiven for thinking Jiangxi Hungpai New Material is a stock not worth researching with a price-to-sales ratios (or "P/S") of 4.3x, considering almost half the companies in China's Chemicals industry have P/S ratios below 2.3x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Jiangxi Hungpai New Material

What Does Jiangxi Hungpai New Material's Recent Performance Look Like?

For instance, Jiangxi Hungpai New Material's receding revenue in recent times would have to be some food for thought. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Jiangxi Hungpai New Material would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered a frustrating 24% decrease to the company's top line. Still, the latest three year period has seen an excellent 45% overall rise in revenue, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 27% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that Jiangxi Hungpai New Material's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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 Final Word

The large bounce in Jiangxi Hungpai New Material's shares has lifted the company's P/S handsomely. 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 Jiangxi Hungpai New Material 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. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Jiangxi Hungpai New Material (2 don't sit too well with us!) that you should be aware of before investing here.

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.