Denox Environmental & Technology Holdings Limited (HKG:1452) shares have retraced a considerable 27% in the last month, reversing a fair amount of their solid recent performance. The recent drop has obliterated the annual return, with the share price now down 9.4% over that longer period.

In spite of the heavy fall in price, you could still be forgiven for feeling indifferent about Denox Environmental & Technology Holdings' P/S ratio of 0.3x, since the median price-to-sales (or "P/S") ratio for the Machinery industry in Hong Kong is also close to 0.6x. 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.

How Has Denox Environmental & Technology Holdings Performed Recently?

With revenue growth that's exceedingly strong of late, Denox Environmental & Technology Holdings has been doing very well. Perhaps the market is expecting future revenue performance to taper off, which has kept the P/S from rising. Those who are bullish on Denox Environmental & Technology Holdings will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Is There Some Revenue Growth Forecasted For Denox Environmental & Technology Holdings?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Denox Environmental & Technology Holdings' to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 101%. The strong recent performance means it was also able to grow revenue by 95% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

This is in contrast to the rest of the industry, which is expected to grow by 12% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's curious that Denox Environmental & Technology Holdings' P/S sits in line with the majority of other companies. Apparently some shareholders believe the recent performance is at its limits and have been accepting lower selling prices.

The Bottom Line On Denox Environmental & Technology Holdings' P/S

Following Denox Environmental & Technology Holdings' share price tumble, its P/S is just clinging on to the industry median P/S. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We've established that Denox Environmental & Technology Holdings currently trades on a lower than expected P/S since its recent three-year growth is higher than the wider industry forecast. When we see strong revenue with faster-than-industry growth, we can only assume potential risks are what might be placing pressure on the P/S ratio. At least the risk of a price drop looks to be subdued if recent medium-term revenue trends continue, but investors seem to think future revenue could see some volatility.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Denox Environmental & Technology Holdings (at least 2 which make us uncomfortable), and understanding these should be part of your investment process.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.