Guangdong Orient Zirconic Ind Sci & Tech Co.,Ltd (SZSE:002167) shares have continued their recent momentum with a 26% gain in the last month alone. Taking a wider view, although not as strong as the last month, the full year gain of 24% is also fairly reasonable.

After such a large jump in price, given close to half the companies operating in China's Chemicals industry have price-to-sales ratios (or "P/S") below 2.3x, you may consider Guangdong Orient Zirconic Ind Sci & TechLtd as a stock to potentially avoid with its 3.8x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

How Has Guangdong Orient Zirconic Ind Sci & TechLtd Performed Recently?

Revenue has risen firmly for Guangdong Orient Zirconic Ind Sci & TechLtd recently, which is pleasing to see. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors' willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

What Are Revenue Growth Metrics Telling Us About The High P/S?

The only time you'd be truly comfortable seeing a P/S as high as Guangdong Orient Zirconic Ind Sci & TechLtd's is when the company's growth is on track to outshine the industry.

Taking a look back first, we see that the company grew revenue by an impressive 15% last year. Pleasingly, revenue has also lifted 30% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenue over that time.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 24% shows it's noticeably less attractive.

With this information, we find it concerning that Guangdong Orient Zirconic Ind Sci & TechLtd is trading at a P/S higher than the industry. 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 Key Takeaway

The large bounce in Guangdong Orient Zirconic Ind Sci & TechLtd's 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.

Our examination of Guangdong Orient Zirconic Ind Sci & TechLtd revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Guangdong Orient Zirconic Ind Sci & TechLtd with six simple checks will allow you to discover any risks that could be an issue.

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.