China Shuifa Singyes New Materials Holdings Limited (HKG:8073) shareholders have had their patience rewarded with a 46% share price jump in the last month. The last month tops off a massive increase of 190% in the last year.

After such a large jump in price, when almost half of the companies in Hong Kong's Chemicals industry have price-to-sales ratios (or "P/S") below 0.4x, you may consider China Shuifa Singyes New Materials Holdings as a stock probably not worth researching with its 1.6x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

What Does China Shuifa Singyes New Materials Holdings' Recent Performance Look Like?

China Shuifa Singyes New Materials Holdings certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. The P/S ratio is probably high because investors think this strong revenue growth will be enough to outperform the broader industry in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should outperform the industry for P/S ratios like China Shuifa Singyes New Materials Holdings' to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 60% last year. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 6.1% shows it's an unpleasant look.

With this information, we find it concerning that China Shuifa Singyes New Materials Holdings is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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 Final Word

China Shuifa Singyes New Materials Holdings' P/S is on the rise since its shares have risen strongly. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our examination of China Shuifa Singyes New Materials Holdings revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

Before you take the next step, you should know about the 3 warning signs for China Shuifa Singyes New Materials Holdings (1 is significant!) that we have uncovered.

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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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.