Jiangxi Chenguang New Materials Company Limited (SHSE:605399) shareholders would be excited to see that the share price has had a great month, posting a 32% gain and recovering from prior weakness. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 37% in the last twelve months.

After such a large jump in price, you could be forgiven for thinking Jiangxi Chenguang New Materials is a stock not worth researching with a price-to-sales ratios (or "P/S") of 4.2x, considering almost half the companies in China's Chemicals industry have P/S ratios below 2.3x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

View our latest analysis for Jiangxi Chenguang New Materials

How Jiangxi Chenguang New Materials Has Been Performing

Jiangxi Chenguang New Materials could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. 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?

The only time you'd be truly comfortable seeing a P/S as high as Jiangxi Chenguang New Materials' is when the company's growth is on track to outshine the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 43%. Even so, admirably revenue has lifted 77% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Shifting to the future, estimates from the two analysts covering the company suggest revenue should grow by 83% over the next year. With the industry only predicted to deliver 27%, the company is positioned for a stronger revenue result.

In light of this, it's understandable that Jiangxi Chenguang New Materials' P/S sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Jiangxi Chenguang New Materials' P/S?

Jiangxi Chenguang New Materials shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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.

Our look into Jiangxi Chenguang New Materials shows that its P/S ratio remains high on the merit of its strong future revenues. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless these conditions change, they will continue to provide strong support to the share price.

Having said that, be aware Jiangxi Chenguang New Materials is showing 3 warning signs in our investment analysis, you should know about.

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.