NanJing Sanchao Advanced Materials Co.,Ltd. (SZSE:300554) shareholders would be excited to see that the share price has had a great month, posting a 47% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 46%.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about NanJing Sanchao Advanced MaterialsLtd's P/S ratio of 6.5x, since the median price-to-sales (or "P/S") ratio for the Semiconductor industry in China is also close to 6.2x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

What Does NanJing Sanchao Advanced MaterialsLtd's Recent Performance Look Like?

Revenue has risen firmly for NanJing Sanchao Advanced MaterialsLtd recently, which is pleasing to see. It might be that many expect the respectable revenue performance to wane, which has kept the P/S from rising. Those who are bullish on NanJing Sanchao Advanced MaterialsLtd will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

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

There's an inherent assumption that a company should be matching the industry for P/S ratios like NanJing Sanchao Advanced MaterialsLtd's to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 8.5% last year. Pleasingly, revenue has also lifted 87% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenues over that time.

Comparing that to the industry, which is predicted to deliver 36% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

In light of this, it's curious that NanJing Sanchao Advanced MaterialsLtd's P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

The Key Takeaway

NanJing Sanchao Advanced MaterialsLtd'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.

Our examination of NanJing Sanchao Advanced MaterialsLtd revealed its poor three-year revenue trends aren't resulting in a lower P/S as per our expectations, given they look worse than current industry outlook. Right now we are uncomfortable with the P/S as this revenue performance isn't likely to support a more positive sentiment for long. If recent medium-term revenue trends continue, the probability of a share price decline will become quite substantial, placing shareholders at risk.

Plus, you should also learn about these 3 warning signs we've spotted with NanJing Sanchao Advanced MaterialsLtd (including 1 which is significant).

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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