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 28% gain and recovering from prior weakness. But the last month did very little to improve the 51% share price decline over the last year.

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 3.3x, considering almost half the companies in China's Chemicals industry have P/S ratios below 2x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

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. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

How Is Jiangxi Chenguang New Materials' Revenue Growth Trending?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Jiangxi Chenguang New Materials' to be considered reasonable.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 43%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 77% in total over the last three years. 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.

Turning to the outlook, the next year should generate growth of 83% as estimated by the two analysts watching the company. With the industry only predicted to deliver 25%, the company is positioned for a stronger revenue result.

With this information, we can see why Jiangxi Chenguang New Materials is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Jiangxi Chenguang New Materials' P/S

The large bounce in Jiangxi Chenguang New Materials' shares has lifted the company's P/S handsomely. 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.

As we suspected, our examination of Jiangxi Chenguang New Materials' analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. 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.

And what about other risks? Every company has them, and we've spotted 4 warning signs for Jiangxi Chenguang New Materials (of which 1 doesn't sit too well with us!) you should know about.

If you're unsure about the strength of Jiangxi Chenguang New Materials' 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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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.