Hunan Kaimeite Gases Co., Ltd. (SZSE:002549) shareholders have had their patience rewarded with a 40% share price jump in the last month. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 34% over that time.

After such a large jump in price, when almost half of the companies in China's Chemicals industry have price-to-sales ratios (or "P/S") below 2x, you may consider Hunan Kaimeite Gases as a stock not worth researching with its 8.9x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

What Does Hunan Kaimeite Gases' P/S Mean For Shareholders?

Hunan Kaimeite Gases could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Hunan Kaimeite Gases' to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 29%. This means it has also seen a slide in revenue over the longer-term as revenue is down 8.4% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Turning to the outlook, the next year should generate growth of 54% as estimated by the sole analyst watching the company. That's shaping up to be materially higher than the 23% growth forecast for the broader industry.

With this information, we can see why Hunan Kaimeite Gases 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 Does Hunan Kaimeite Gases' P/S Mean For Investors?

Hunan Kaimeite Gases' P/S has grown nicely over the last month thanks to a handy boost in the share price. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our look into Hunan Kaimeite Gases shows that its P/S ratio remains high on the merit of its strong future revenues. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

You should always think about risks. Case in point, we've spotted 1 warning sign for Hunan Kaimeite Gases 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.