Despite an already strong run, Fujian Jinsen Forestry Co.,Ltd (SZSE:002679) shares have been powering on, with a gain of 32% in the last thirty days. 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.

Since its price has surged higher, given around half the companies in China's Forestry industry have price-to-sales ratios (or "P/S") below 1.5x, you may consider Fujian Jinsen ForestryLtd as a stock to avoid entirely with its 13.7x 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 Fujian Jinsen ForestryLtd Performed Recently?

For example, consider that Fujian Jinsen ForestryLtd's financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is Fujian Jinsen ForestryLtd's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Fujian Jinsen ForestryLtd's is when the company's growth is on track to outshine the industry decidedly.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 1.4%. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 30% in total. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Comparing that to the industry, which is predicted to deliver 16% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

In light of this, it's alarming that Fujian Jinsen ForestryLtd's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Bottom Line On Fujian Jinsen ForestryLtd's P/S

Fujian Jinsen ForestryLtd's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

The fact that Fujian Jinsen ForestryLtd currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

You need to take note of risks, for example - Fujian Jinsen ForestryLtd has 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

If you're unsure about the strength of Fujian Jinsen ForestryLtd'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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