The Hainan RuiZe New Building Material Co.,Ltd (SZSE:002596) share price has fared very poorly over the last month, falling by a substantial 25%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 42% share price drop.
Although its price has dipped substantially, you could still be forgiven for feeling indifferent about Hainan RuiZe New Building MaterialLtd's P/S ratio of 1.3x, since the median price-to-sales (or "P/S") ratio for the Basic Materials industry in China is also close to 1.2x. 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.
SZSE:002596 Price to Sales Ratio vs Industry February 5th 2024
How Has Hainan RuiZe New Building MaterialLtd Performed Recently?
For example, consider that Hainan RuiZe New Building MaterialLtd's financial performance has been poor lately as its revenue has been in decline. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. 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.
We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Hainan RuiZe New Building MaterialLtd's earnings, revenue and cash flow.
What Are Revenue Growth Metrics Telling Us About The P/S?
Hainan RuiZe New Building MaterialLtd's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.
Retrospectively, the last year delivered a frustrating 23% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 29% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.
Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 16% shows it's an unpleasant look.
In light of this, it's somewhat alarming that Hainan RuiZe New Building MaterialLtd's P/S sits in line with the majority of other companies. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.
The Final Word
With its share price dropping off a cliff, the P/S for Hainan RuiZe New Building MaterialLtd looks to be in line with the rest of the Basic Materials industry. 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.
Our look at Hainan RuiZe New Building MaterialLtd revealed its shrinking revenues over the medium-term haven't impacted the P/S as much as we anticipated, given the industry is set to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.
You should always think about risks. Case in point, we've spotted 1 warning sign for Hainan RuiZe New Building MaterialLtd you should be aware of.
If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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