China Metal Resources Utilization Limited (HKG:1636) Stock Rockets 117% As Investors Are Less Pessimistic Than Expected

China Metal Resources Utilization Limited (HKG:1636) shareholders would be excited to see that the share price has had a great month, posting a 117% gain and recovering from prior weakness. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

Although its price has surged higher, there still wouldn't be many who think China Metal Resources Utilization's price-to-sales (or "P/S") ratio of 0.7x is worth a mention when the median P/S in Hong Kong's Metals and Mining industry is similar at about 0.5x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

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Check out our latest analysis for China Metal Resources Utilization

How Has China Metal Resources Utilization Performed Recently?

For instance, China Metal Resources Utilization's receding revenue in recent times would have to be some food for thought. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

Is There Some Revenue Growth Forecasted For China Metal Resources Utilization?

The only time you'd be comfortable seeing a P/S like China Metal Resources Utilization's is when the company's growth is tracking the industry closely.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 44%. This means it has also seen a slide in revenue over the longer-term as revenue is down 94% 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.

Comparing that to the industry, which is predicted to deliver 11% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this information, we find it concerning that China Metal Resources Utilization is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. 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 the recent negative growth rates.

The Key Takeaway

China Metal Resources Utilization appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

The fact that China Metal Resources Utilization currently trades at a P/S on par with the rest of the industry is surprising to us since its recent revenues have been in decline over the medium-term, all while the industry is set to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Don't forget that there may be other risks. For instance, we've identified 5 warning signs for China Metal Resources Utilization (4 are concerning) you should be aware of.

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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.