Despite an already strong run, Hubei Xiangyuan New Material Technology Inc. (SZSE:300980) shares have been powering on, with a gain of 27% in the last thirty days. Notwithstanding the latest gain, the annual share price return of 7.5% isn't as impressive.

Since its price has surged higher, given around half the companies in China's Chemicals industry have price-to-sales ratios (or "P/S") below 2.5x, you may consider Hubei Xiangyuan New Material Technology as a stock to avoid entirely with its 7.1x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

What Does Hubei Xiangyuan New Material Technology's Recent Performance Look Like?

Recent times have been advantageous for Hubei Xiangyuan New Material Technology as its revenues have been rising faster than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is Hubei Xiangyuan New Material Technology's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Hubei Xiangyuan New Material Technology's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 27% gain to the company's top line. Although, its longer-term performance hasn't been as strong with three-year revenue growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, revenue is anticipated to climb by 20% during the coming year according to the only analyst following the company. Meanwhile, the rest of the industry is forecast to expand by 25%, which is noticeably more attractive.

With this information, we find it concerning that Hubei Xiangyuan New Material Technology is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What Does Hubei Xiangyuan New Material Technology's P/S Mean For Investors?

Hubei Xiangyuan New Material Technology's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Hubei Xiangyuan New Material Technology, this doesn't appear to be impacting the P/S in the slightest. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. At these price levels, investors should remain cautious, particularly if things don't improve.

It is also worth noting that we have found 3 warning signs for Hubei Xiangyuan New Material Technology that you need to take into consideration.

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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