Sichuan Golden Summit (group) Joint-Stock Co., Ltd. (SHSE:600678) shareholders have had their patience rewarded with a 92% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 87% in the last year.

Following the firm bounce in price, you could be forgiven for thinking Sichuan Golden Summit (group) is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 11.1x, considering almost half the companies in China's Basic Materials industry have P/S ratios below 1.5x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Sichuan Golden Summit (group)

How Sichuan Golden Summit (group) Has Been Performing

As an illustration, revenue has deteriorated at Sichuan Golden Summit (group) over the last year, which is not ideal at all. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. However, if this isn't the case, investors might get caught out paying too much for the stock.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Sichuan Golden Summit (group)'s to be considered reasonable.

Retrospectively, the last year delivered a frustrating 5.5% decrease to the company's top line. Even so, admirably revenue has lifted 39% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 17% shows it's noticeably less attractive.

In light of this, it's alarming that Sichuan Golden Summit (group)'s P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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 recent growth rates.

The Bottom Line On Sichuan Golden Summit (group)'s P/S

The strong share price surge has lead to Sichuan Golden Summit (group)'s P/S soaring as well. 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.

The fact that Sichuan Golden Summit (group) currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Plus, you should also learn about these 5 warning signs we've spotted with Sichuan Golden Summit (group) (including 3 which are significant).

If these risks are making you reconsider your opinion on Sichuan Golden Summit (group), explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.