Gansu Golden Solar Co., Ltd (SZSE:300093) shares have continued their recent momentum with a 27% gain in the last month alone. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 44% in the last twelve months.
Following the firm bounce in price, you could be forgiven for thinking Gansu Golden Solar is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 8.5x, considering almost half the companies in China's Building industry have P/S ratios below 2.1x. 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 Gansu Golden Solar
What Does Gansu Golden Solar's P/S Mean For Shareholders?
With revenue growth that's exceedingly strong of late, Gansu Golden Solar has been doing very well. It seems that many are expecting the strong revenue performance to beat most other companies over the coming period, which has increased investors' willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.
What Are Revenue Growth Metrics Telling Us About The High P/S?
There's an inherent assumption that a company should far outperform the industry for P/S ratios like Gansu Golden Solar's to be considered reasonable.
Retrospectively, the last year delivered an exceptional 92% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 46% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.
Comparing that to the industry, which is predicted to deliver 26% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.
In light of this, it's alarming that Gansu Golden Solar'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 Gansu Golden Solar's P/S
Gansu Golden Solar's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.
Our examination of Gansu Golden Solar revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.
You always need to take note of risks, for example - Gansu Golden Solar has 3 warning signs we think you should be aware of.
If these risks are making you reconsider your opinion on Gansu Golden Solar, 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.
