Jinchuan Group International Resources Co. Ltd (HKG:2362) 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. The last 30 days bring the annual gain to a very sharp 56%.
After such a large jump in price, you could be forgiven for thinking Jinchuan Group International Resources is a stock not worth researching with a price-to-sales ratios (or "P/S") of 1.8x, considering almost half the companies in Hong Kong's Metals and Mining industry have P/S ratios below 0.5x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.
Check out our latest analysis for Jinchuan Group International Resources
How Has Jinchuan Group International Resources Performed Recently?
As an illustration, revenue has deteriorated at Jinchuan Group International Resources over the last year, which is not ideal at all. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.
Although there are no analyst estimates available for Jinchuan Group International Resources, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.How Is Jinchuan Group International Resources' Revenue Growth Trending?
In order to justify its P/S ratio, Jinchuan Group International Resources would need to produce impressive growth in excess of the industry.
In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 11%. As a result, revenue from three years ago have also fallen 12% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.
In contrast to the company, the rest of the industry is expected to grow by 14% over the next year, which really puts the company's recent medium-term revenue decline into perspective.
In light of this, it's alarming that Jinchuan Group International Resources' 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 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.
What We Can Learn From Jinchuan Group International Resources' P/S?
Jinchuan Group International Resources' P/S is on the rise since its shares have risen strongly. 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.
We've established that Jinchuan Group International Resources 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. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.
We don't want to rain on the parade too much, but we did also find 2 warning signs for Jinchuan Group International Resources that you need to be mindful of.
If you're unsure about the strength of Jinchuan Group International Resources' 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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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.