Guangdong New Grand Long Packing Co., Ltd. (SZSE:002836) shareholders are no doubt pleased to see that the share price has bounced 36% in the last month, although it is still struggling to make up recently lost ground. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 21% over that time.

Following the firm bounce in price, given around half the companies in China's Packaging industry have price-to-sales ratios (or "P/S") below 2x, you may consider Guangdong New Grand Long Packing as a stock to avoid entirely with its 10.1x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

How Guangdong New Grand Long Packing Has Been Performing

For example, consider that Guangdong New Grand Long Packing's financial performance has been pretty ordinary lately as revenue growth is non-existent. One possibility is that the P/S is high because investors think the benign revenue growth will improve to outperform the broader industry in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as steep as Guangdong New Grand Long Packing's is when the company's growth is on track to outshine the industry decidedly.

Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. Whilst it's an improvement, it wasn't enough to get the company out of the hole it was in, with revenue down 50% overall from three years ago. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 20% shows it's an unpleasant look.

In light of this, it's alarming that Guangdong New Grand Long Packing's P/S sits above the majority of other companies. 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 Final Word

Shares in Guangdong New Grand Long Packing have seen a strong upwards swing lately, which has really helped boost its P/S figure. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Guangdong New Grand Long Packing currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. 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. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Before you take the next step, you should know about the 4 warning signs for Guangdong New Grand Long Packing (2 make us uncomfortable!) that we have uncovered.

If you're unsure about the strength of Guangdong New Grand Long Packing's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.