China Dredging Environment Protection Holdings Limited (HKG:871) shareholders have had their patience rewarded with a 48% share price jump in the last month. The last month tops off a massive increase of 153% in the last year.

In spite of the firm bounce in price, given about half the companies operating in Hong Kong's Infrastructure industry have price-to-sales ratios (or "P/S") above 1.5x, you may still consider China Dredging Environment Protection Holdings as an attractive investment with its 0.5x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

How China Dredging Environment Protection Holdings Has Been Performing

For instance, China Dredging Environment Protection Holdings' receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Is There Any Revenue Growth Forecasted For China Dredging Environment Protection Holdings?

The only time you'd be truly comfortable seeing a P/S as low as China Dredging Environment Protection Holdings' is when the company's growth is on track to lag the industry.

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 2.7%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 31% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

When compared to the industry's one-year growth forecast of 7.1%, the most recent medium-term revenue trajectory is noticeably more alluring

In light of this, it's peculiar that China Dredging Environment Protection Holdings' P/S sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

What Does China Dredging Environment Protection Holdings' P/S Mean For Investors?

Despite China Dredging Environment Protection Holdings' share price climbing recently, its P/S still lags most other companies. 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.

Our examination of China Dredging Environment Protection Holdings revealed its three-year revenue trends aren't boosting its P/S anywhere near as much as we would have predicted, given they look better than current industry expectations. Potential investors that are sceptical over continued revenue performance may be preventing the P/S ratio from matching previous strong performance. It appears many are indeed anticipating revenue instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with China Dredging Environment Protection Holdings, and understanding them should be part of your investment process.

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.

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.