With a price-to-sales (or "P/S") ratio of 0.5x Pengdu Agriculture & Animal Husbandry Co.,Ltd. (SZSE:002505) may be sending bullish signals at the moment, given that almost half of all the Food companies in China have P/S ratios greater than 1.9x and even P/S higher than 4x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

View our latest analysis for Pengdu Agriculture & Animal HusbandryLtd

What Does Pengdu Agriculture & Animal HusbandryLtd's P/S Mean For Shareholders?

For example, consider that Pengdu Agriculture & Animal HusbandryLtd's financial performance has been poor lately as its revenue has been in decline. 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. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

Is There Any Revenue Growth Forecasted For Pengdu Agriculture & Animal HusbandryLtd?

Pengdu Agriculture & Animal HusbandryLtd's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than 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 7.7%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 34% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 17% shows it's noticeably less attractive.

With this information, we can see why Pengdu Agriculture & Animal HusbandryLtd 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.

The Final Word

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

In line with expectations, Pengdu Agriculture & Animal HusbandryLtd maintains its low P/S on the weakness of its recent three-year growth being lower than the wider industry forecast. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Pengdu Agriculture & Animal HusbandryLtd with six simple checks on some of these key factors.

If you're unsure about the strength of Pengdu Agriculture & Animal HusbandryLtd'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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