What China Environmental Technology and Bioenergy Holdings Limited's (HKG:1237) 100% Share Price Gain Is Not Telling You

China Environmental Technology and Bioenergy Holdings Limited (HKG:1237) shares have continued their recent momentum with a 100% gain in the last month alone. The last 30 days were the cherry on top of the stock's 329% gain in the last year, which is nothing short of spectacular.

In spite of the firm bounce in price, there still wouldn't be many who think China Environmental Technology and Bioenergy Holdings' price-to-sales (or "P/S") ratio of 0.3x is worth a mention when the median P/S in Hong Kong's Leisure industry is similar at about 0.7x. 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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View our latest analysis for China Environmental Technology and Bioenergy Holdings

What Does China Environmental Technology and Bioenergy Holdings' Recent Performance Look Like?

Recent times have been quite advantageous for China Environmental Technology and Bioenergy Holdings as its revenue has been rising very briskly. The P/S is probably moderate because investors think this strong revenue growth might not be enough to outperform the broader industry in the near future. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

How Is China Environmental Technology and Bioenergy Holdings' Revenue Growth Trending?

China Environmental Technology and Bioenergy Holdings' P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

Taking a look back first, we see that the company grew revenue by an impressive 38% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 33% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

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 in mind, we find it worrying that China Environmental Technology and Bioenergy Holdings' 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. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

The Bottom Line On China Environmental Technology and Bioenergy Holdings' P/S

China Environmental Technology and Bioenergy Holdings' stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our look at China Environmental Technology and Bioenergy Holdings revealed its shrinking revenues over the medium-term haven't impacted the P/S as much as we anticipated, given the industry is set to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you take the next step, you should know about the 2 warning signs for China Environmental Technology and Bioenergy Holdings (1 shouldn't be ignored!) that we have uncovered.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.