The Shenzhen Cotran New Material Co.,Ltd. (SZSE:300731) share price has fared very poorly over the last month, falling by a substantial 28%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 24% share price drop.
Although its price has dipped substantially, when almost half of the companies in China's Chemicals industry have price-to-sales ratios (or "P/S") below 2x, you may still consider Shenzhen Cotran New MaterialLtd as a stock probably not worth researching with its 3.8x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.
See our latest analysis for Shenzhen Cotran New MaterialLtd
How Shenzhen Cotran New MaterialLtd Has Been Performing
Recent revenue growth for Shenzhen Cotran New MaterialLtd has been in line with the industry. One possibility is that the P/S ratio is high because investors think this modest revenue performance will accelerate. If not, then existing shareholders may be a little nervous about the viability of the share price.
How Is Shenzhen Cotran New MaterialLtd's Revenue Growth Trending?
There's an inherent assumption that a company should outperform the industry for P/S ratios like Shenzhen Cotran New MaterialLtd's to be considered reasonable.
Taking a look back first, we see that the company managed to grow revenues by a handy 3.0% last year. Pleasingly, revenue has also lifted 69% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.
Turning to the outlook, the next year should generate growth of 56% as estimated by the sole analyst watching the company. Meanwhile, the rest of the industry is forecast to only expand by 26%, which is noticeably less attractive.
With this information, we can see why Shenzhen Cotran New MaterialLtd is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
What We Can Learn From Shenzhen Cotran New MaterialLtd's P/S?
Shenzhen Cotran New MaterialLtd's P/S remain high even after its stock plunged. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
As we suspected, our examination of Shenzhen Cotran New MaterialLtd's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.
Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Shenzhen Cotran New MaterialLtd that you should be aware of.
If these risks are making you reconsider your opinion on Shenzhen Cotran New MaterialLtd, 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.
