Sichuan Golden Summit (group) Joint-Stock Co., Ltd. (SHSE:600678) shareholders are no doubt pleased to see that the share price has bounced 45% in the last month, although it is still struggling to make up recently lost ground. The last 30 days bring the annual gain to a very sharp 26%.

Since its price has surged higher, you could be forgiven for thinking Sichuan Golden Summit (group) is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 7.8x, considering almost half the companies in China's Basic Materials industry have P/S ratios below 1.4x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

How Sichuan Golden Summit (group) Has Been Performing

As an illustration, revenue has deteriorated at Sichuan Golden Summit (group) over the last year, which is not ideal at all. 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.

Is There Enough Revenue Growth Forecasted For Sichuan Golden Summit (group)?

Sichuan Golden Summit (group)'s P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

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 5.5%. Even so, admirably revenue has lifted 39% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

It's interesting to note that the rest of the industry is similarly expected to grow by 12% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.

With this information, we find it interesting that Sichuan Golden Summit (group) is trading at a high P/S compared to the industry. It seems most investors are ignoring the fairly average recent growth rates and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as a continuation of recent revenue trends would weigh down the share price eventually.

What We Can Learn From Sichuan Golden Summit (group)'s P/S?

Shares in Sichuan Golden Summit (group) have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

Our examination of Sichuan Golden Summit (group) revealed its three-year revenue trends aren't impacting its high P/S as much as we would have predicted, given they look similar to current industry expectations. When we see average revenue with industry-like growth combined with a high P/S, we suspect the share price is at risk of declining, bringing the P/S back in line with the industry too. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

It is also worth noting that we have found 5 warning signs for Sichuan Golden Summit (group) (4 shouldn't be ignored!) that you need to take into consideration.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.