Tonze New Energy Technology Co.,Ltd. (SZSE:002759) shares have had a horrible month, losing 30% after a relatively good period beforehand. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 25% in that time.

Even after such a large drop in price, there still wouldn't be many who think Tonze New Energy TechnologyLtd's price-to-sales (or "P/S") ratio of 1.9x is worth a mention when it essentially matches the median P/S in China's Consumer Durables industry. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

What Does Tonze New Energy TechnologyLtd's P/S Mean For Shareholders?

For example, consider that Tonze New Energy TechnologyLtd's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

Is There Some Revenue Growth Forecasted For Tonze New Energy TechnologyLtd?

The only time you'd be comfortable seeing a P/S like Tonze New Energy TechnologyLtd's is when the company's growth is tracking the industry closely.

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 21%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 15% 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 10% shows it's noticeably less attractive.

With this information, we find it interesting that Tonze New Energy TechnologyLtd is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

The Key Takeaway

Tonze New Energy TechnologyLtd's plummeting stock price has brought its P/S back to a similar region as the rest of the industry. 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.

We've established that Tonze New Energy TechnologyLtd's average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. 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. Unless the recent medium-term conditions improve, it's hard to accept the current share price as fair value.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Tonze New Energy TechnologyLtd you should know about.

If you're unsure about the strength of Tonze New Energy TechnologyLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.