Liaoning Kelong Fine Chemical,Inc. (SZSE:300405) shareholders are no doubt pleased to see that the share price has bounced 26% in the last month, although it is still struggling to make up recently lost ground. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 7.6% in the last twelve months.

Following the firm bounce in price, given close to half the companies operating in China's Chemicals industry have price-to-sales ratios (or "P/S") below 1.9x, you may consider Liaoning Kelong Fine ChemicalInc as a stock to potentially avoid with its 2.9x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

What Does Liaoning Kelong Fine ChemicalInc's P/S Mean For Shareholders?

For instance, Liaoning Kelong Fine ChemicalInc's receding revenue in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Do Revenue Forecasts Match The High P/S Ratio?

Liaoning Kelong Fine ChemicalInc's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Retrospectively, the last year delivered a frustrating 45% decrease to the company's top line. As a result, revenue from three years ago have also fallen 47% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 25% shows it's an unpleasant look.

With this information, we find it concerning that Liaoning Kelong Fine ChemicalInc is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Bottom Line On Liaoning Kelong Fine ChemicalInc's P/S

The large bounce in Liaoning Kelong Fine ChemicalInc's shares has lifted the company's P/S handsomely. 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.

Our examination of Liaoning Kelong Fine ChemicalInc revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Liaoning Kelong Fine ChemicalInc that you should be aware of.

If you're unsure about the strength of Liaoning Kelong Fine ChemicalInc's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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