You may think that with a price-to-sales (or "P/S") ratio of 0.3x Guangxi Energy Co., Ltd. (SHSE:600310) is a stock worth checking out, seeing as almost half of all the Electric Utilities companies in China have P/S ratios greater than 1.2x and even P/S higher than 4x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

Check out our latest analysis for Guangxi Energy

How Guangxi Energy Has Been Performing

Recent times have been pleasing for Guangxi Energy as its revenue has risen in spite of the industry's average revenue going into reverse. One possibility is that the P/S ratio is low because investors think the company's revenue is going to fall away like everyone else's soon. Those who are bullish on Guangxi Energy will be hoping that this isn't the case and the company continues to beat out the industry.

Is There Any Revenue Growth Forecasted For Guangxi Energy?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Guangxi Energy's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 23% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 41% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

Shifting to the future, estimates from the lone analyst covering the company suggest revenue growth is heading into negative territory, declining 74% over the next year. Meanwhile, the broader industry is forecast to expand by 9.2%, which paints a poor picture.

In light of this, it's understandable that Guangxi Energy's P/S would sit below the majority of other companies. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

What We Can Learn From Guangxi Energy's P/S?

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.

As we suspected, our examination of Guangxi Energy's analyst forecasts revealed that its outlook for shrinking revenue is contributing to its low P/S. As other companies in the industry are forecasting revenue growth, Guangxi Energy's poor outlook justifies its low P/S ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

You always need to take note of risks, for example - Guangxi Energy has 1 warning sign we think 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.