Despite an already strong run, Anhui Liuguo Chemical Co., Ltd. (SHSE:600470) shares have been powering on, with a gain of 31% in the last thirty days. Unfortunately, despite the strong performance over the last month, the full year gain of 3.5% isn't as attractive.

Although its price has surged higher, Anhui Liuguo Chemical's price-to-sales (or "P/S") ratio of 0.5x might still make it look like a buy right now compared to the Chemicals industry in China, where around half of the companies have P/S ratios above 2.3x and even P/S above 5x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

What Does Anhui Liuguo Chemical's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Anhui Liuguo Chemical over the last year, which is not ideal at all. 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.

How Is Anhui Liuguo Chemical's Revenue Growth Trending?

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

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 3.1%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 16% overall rise in revenue. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 25% shows it's noticeably less attractive.

With this information, we can see why Anhui Liuguo Chemical is trading at a P/S lower than the industry. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

What We Can Learn From Anhui Liuguo Chemical's P/S?

Despite Anhui Liuguo Chemical's share price climbing recently, its P/S still lags most other companies. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

In line with expectations, Anhui Liuguo Chemical maintains its low P/S on the weakness of its recent three-year growth being lower than the wider industry forecast. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Plus, you should also learn about this 1 warning sign we've spotted with Anhui Liuguo Chemical.

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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