The Chongqing Sifang New Material Co., Ltd. (SHSE:605122) share price has done very well over the last month, posting an excellent gain of 43%. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 9.4% in the last twelve months.

In spite of the firm bounce in price, it's still not a stretch to say that Chongqing Sifang New Material's price-to-sales (or "P/S") ratio of 1.3x right now seems quite "middle-of-the-road" compared to the Basic Materials industry in China, seeing as it matches the P/S ratio of the wider industry. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

What Does Chongqing Sifang New Material's P/S Mean For Shareholders?

For example, consider that Chongqing Sifang New Material's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is moderate because investors think the company might still do enough to be in line with the broader industry in the near future. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

Is There Some Revenue Growth Forecasted For Chongqing Sifang New Material?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Chongqing Sifang New Material's to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 7.8%. Still, the latest three year period has seen an excellent 46% 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.

When compared to the industry's one-year growth forecast of 7.5%, the most recent medium-term revenue trajectory is noticeably more alluring

In light of this, it's curious that Chongqing Sifang New Material's P/S sits in line with the majority of other companies. Apparently some shareholders believe the recent performance is at its limits and have been accepting lower selling prices.

What We Can Learn From Chongqing Sifang New Material's P/S?

Chongqing Sifang New Material's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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.

To our surprise, Chongqing Sifang New Material revealed its three-year revenue trends aren't contributing to its P/S as much as we would have predicted, given they look better than current industry expectations. 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. It appears some are indeed anticipating revenue instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

Before you settle on your opinion, we've discovered 1 warning sign for Chongqing Sifang New Material that you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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