With a price-to-sales (or "P/S") ratio of 0.6x Hubei Yihua Chemical Industry Co., Ltd. (SZSE:000422) may be sending bullish signals at the moment, given that almost half of all the Chemicals companies in China have P/S ratios greater than 2.4x and even P/S higher than 6x are not unusual. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Hubei Yihua Chemical Industry

How Hubei Yihua Chemical Industry Has Been Performing

While the industry has experienced revenue growth lately, Hubei Yihua Chemical Industry's revenue has gone into reverse gear, which is not great. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

How Is Hubei Yihua Chemical Industry's Revenue Growth Trending?

In order to justify its P/S ratio, Hubei Yihua Chemical Industry would need to produce sluggish growth that's trailing the industry.

Retrospectively, the last year delivered a frustrating 5.2% decrease to the company's top line. Still, the latest three year period has seen an excellent 36% overall rise in revenue, in spite of its unsatisfying short-term performance. 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.

Shifting to the future, estimates from the sole analyst covering the company suggest revenue growth is heading into negative territory, declining 1.4% over the next year. That's not great when the rest of the industry is expected to grow by 29%.

In light of this, it's understandable that Hubei Yihua Chemical Industry's P/S would sit below the majority of other companies. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Final Word

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.

As we suspected, our examination of Hubei Yihua Chemical Industry's analyst forecasts revealed that its outlook for shrinking revenue is contributing to its low P/S. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless there's material change, it's hard to envision a situation where the stock price will rise drastically.

Before you take the next step, you should know about the 10 warning signs for Hubei Yihua Chemical Industry that we have uncovered.

If these risks are making you reconsider your opinion on Hubei Yihua Chemical Industry, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.