The Crown Advanced Material Co.,Ltd. (SHSE:688560) share price has fared very poorly over the last month, falling by a substantial 30%. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 72% loss during that time.

In spite of the heavy fall in price, you could still be forgiven for feeling indifferent about Crown Advanced MaterialLtd's P/S ratio of 1.7x, since the median price-to-sales (or "P/S") ratio for the Chemicals industry in China is also close to 1.8x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

What Does Crown Advanced MaterialLtd's P/S Mean For Shareholders?

For example, consider that Crown Advanced MaterialLtd's financial performance has been poor lately as its revenue has been in decline. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. If not, then existing shareholders may be a little nervous about the viability of the share price.

Do Revenue Forecasts Match The P/S Ratio?

In order to justify its P/S ratio, Crown Advanced MaterialLtd would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a frustrating 8.9% decrease to the company's top line. Still, the latest three year period has seen an excellent 77% overall rise in revenue, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very 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 26% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this in mind, we find it intriguing that Crown Advanced MaterialLtd's P/S is comparable to that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Bottom Line On Crown Advanced MaterialLtd's P/S

Following Crown Advanced MaterialLtd's share price tumble, its P/S is just clinging on to the industry median P/S. 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.

Our examination of Crown Advanced MaterialLtd revealed its poor three-year revenue trends aren't resulting in a lower P/S as per our expectations, given they look worse than current industry outlook. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. If recent medium-term revenue trends continue, the probability of a share price decline will become quite substantial, placing shareholders at risk.

Before you settle on your opinion, we've discovered 4 warning signs for Crown Advanced MaterialLtd (1 is concerning!) that you should be aware of.

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.