NanJing Sanchao Advanced Materials Co.,Ltd. (SZSE:300554) shareholders have had their patience rewarded with a 30% share price jump in the last month. Unfortunately, despite the strong performance over the last month, the full year gain of 6.2% isn't as attractive.

Although its price has surged higher, NanJing Sanchao Advanced MaterialsLtd's price-to-sales (or "P/S") ratio of 5.8x might still make it look like a buy right now compared to the Semiconductor industry in China, where around half of the companies have P/S ratios above 8.5x and even P/S above 16x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for NanJing Sanchao Advanced MaterialsLtd

How Has NanJing Sanchao Advanced MaterialsLtd Performed Recently?

NanJing Sanchao Advanced MaterialsLtd certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. Perhaps the market is expecting future revenue performance to dwindle, which has kept the P/S suppressed. 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.

Do Revenue Forecasts Match The Low P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as low as NanJing Sanchao Advanced MaterialsLtd's is when the company's growth is on track to lag the industry.

Taking a look back first, we see that the company grew revenue by an impressive 38% last year. The strong recent performance means it was also able to grow revenue by 89% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 42% shows it's noticeably less attractive.

With this information, we can see why NanJing Sanchao Advanced MaterialsLtd is trading at a P/S lower than the industry. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

What We Can Learn From NanJing Sanchao Advanced MaterialsLtd's P/S?

NanJing Sanchao Advanced MaterialsLtd's stock price has surged recently, but its but its P/S still remains modest. 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.

As we suspected, our examination of NanJing Sanchao Advanced MaterialsLtd revealed its three-year revenue trends are contributing to its low P/S, given they look worse than current industry expectations. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

Before you settle on your opinion, we've discovered 4 warning signs for NanJing Sanchao Advanced MaterialsLtd (2 are significant!) that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.