Despite an already strong run, Zhejiang Unifull Industrial Fibre Co., Ltd. (SZSE:002427) shares have been powering on, with a gain of 29% in the last thirty days. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 21% over that time.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Zhejiang Unifull Industrial Fibre's P/S ratio of 1.8x, since the median price-to-sales (or "P/S") ratio for the Luxury industry in China is also close to 1.6x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

What Does Zhejiang Unifull Industrial Fibre's Recent Performance Look Like?

For example, consider that Zhejiang Unifull Industrial Fibre's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is moderate because investors think the company might still do enough to be in line with the broader industry in the near future. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

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 Zhejiang Unifull Industrial Fibre's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 9.4% decrease to the company's top line. As a result, revenue from three years ago have also fallen 16% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 16% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's somewhat alarming that Zhejiang Unifull Industrial Fibre's P/S sits in line with the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What We Can Learn From Zhejiang Unifull Industrial Fibre's P/S?

Zhejiang Unifull Industrial Fibre's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our look at Zhejiang Unifull Industrial Fibre revealed its shrinking revenues over the medium-term haven't impacted the P/S as much as we anticipated, given the industry is set to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Zhejiang Unifull Industrial Fibre 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.

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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.