Despite an already strong run, Shanxi Huayang New Material Co.,Ltd. (SHSE:600281) shares have been powering on, with a gain of 32% in the last thirty days. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 3.6% in the last twelve months.

Since its price has surged higher, given around half the companies in China's Metals and Mining industry have price-to-sales ratios (or "P/S") below 1.4x, you may consider Shanxi Huayang New MaterialLtd as a stock to avoid entirely with its 8.5x 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 Has Shanxi Huayang New MaterialLtd Performed Recently?

For instance, Shanxi Huayang New MaterialLtd'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. If not, then existing shareholders may be quite nervous about the viability of the share price.

How Is Shanxi Huayang New MaterialLtd's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Shanxi Huayang New MaterialLtd's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 28% decrease to the company's top line. As a result, revenue from three years ago have also fallen 14% 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 13% shows it's an unpleasant look.

With this in mind, we find it worrying that Shanxi Huayang New MaterialLtd's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Final Word

The strong share price surge has lead to Shanxi Huayang New MaterialLtd's P/S soaring as well. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that Shanxi Huayang New MaterialLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Shanxi Huayang New MaterialLtd that you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.