Those holding GuangDong Leary New Material Technology Co.,Ltd. (SHSE:688683) shares would be relieved that the share price has rebounded 39% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 19% in the last twelve months.

Following the firm bounce in price, you could be forgiven for thinking GuangDong Leary New Material TechnologyLtd is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 6.6x, considering almost half the companies in China's Chemicals industry have P/S ratios below 2.1x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

How Has GuangDong Leary New Material TechnologyLtd Performed Recently?

As an illustration, revenue has deteriorated at GuangDong Leary New Material TechnologyLtd 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. However, if this isn't the case, investors might get caught out paying too much for the stock.

Is There Enough Revenue Growth Forecasted For GuangDong Leary New Material TechnologyLtd?

In order to justify its P/S ratio, GuangDong Leary New Material TechnologyLtd would need to produce outstanding growth that's well in excess of 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 7.9%. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 9.3% in total. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

This is in contrast to the rest of the industry, which is expected to grow by 25% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that GuangDong Leary New Material TechnologyLtd's P/S sits above the majority of other companies. 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 Bottom Line On GuangDong Leary New Material TechnologyLtd's P/S

Shares in GuangDong Leary New Material TechnologyLtd have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

The fact that GuangDong Leary New Material TechnologyLtd currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

It is also worth noting that we have found 3 warning signs for GuangDong Leary New Material TechnologyLtd (2 are a bit unpleasant!) that you need to take into consideration.

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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