Those holding Gansu Yatai Industrial Developent Co.,Ltd. (SZSE:000691) shares would be relieved that the share price has rebounded 40% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 16% over that time.

Following the firm bounce in price, given close to half the companies operating in China's Chemicals industry have price-to-sales ratios (or "P/S") below 2.1x, you may consider Gansu Yatai Industrial DevelopentLtd as a stock to potentially avoid with its 3x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

What Does Gansu Yatai Industrial DevelopentLtd's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Gansu Yatai Industrial DevelopentLtd 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.

Do Revenue Forecasts Match The High P/S Ratio?

Gansu Yatai Industrial DevelopentLtd's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 20%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 136% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Comparing that recent medium-term revenue trajectory with the industry's one-year growth forecast of 25% shows it's noticeably more attractive.

In light of this, it's understandable that Gansu Yatai Industrial DevelopentLtd's P/S sits above the majority of other companies. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Bottom Line On Gansu Yatai Industrial DevelopentLtd's P/S

The large bounce in Gansu Yatai Industrial DevelopentLtd's shares has lifted the company's P/S handsomely. 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.

As we suspected, our examination of Gansu Yatai Industrial DevelopentLtd revealed its three-year revenue trends are contributing to its high P/S, given they look better than current industry expectations. At this stage investors feel the potential continued revenue growth in the future is great enough to warrant an inflated P/S. If recent medium-term revenue trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Gansu Yatai Industrial DevelopentLtd (of which 1 shouldn't be ignored!) you should know about.

If you're unsure about the strength of Gansu Yatai Industrial DevelopentLtd's 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.