The Henan Huaying Agricultural Development Co., Ltd. (SZSE:002321) share price has fared very poorly over the last month, falling by a substantial 26%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 31% share price drop.

Even after such a large drop in price, it's still not a stretch to say that Henan Huaying Agricultural Development's price-to-sales (or "P/S") ratio of 1.1x right now seems quite "middle-of-the-road" compared to the Food industry in China, where the median P/S ratio is around 1.5x. 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 Henan Huaying Agricultural Development's Recent Performance Look Like?

Henan Huaying Agricultural Development has been doing a decent job lately as it's been growing revenue at a reasonable pace. It might be that many expect the respectable revenue performance to only match most other companies over the coming period, which has kept the P/S from rising. If not, then at least existing shareholders probably aren't too pessimistic about the future direction of the share price.

What Are Revenue Growth Metrics Telling Us About The P/S?

In order to justify its P/S ratio, Henan Huaying Agricultural Development would need to produce growth that's similar to the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 5.8%. However, this wasn't enough as the latest three year period has seen an unpleasant 3.5% overall drop in revenue. 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 15% shows it's an unpleasant look.

With this in mind, we find it worrying that Henan Huaying Agricultural Development's P/S exceeds that of its industry peers. 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.

What We Can Learn From Henan Huaying Agricultural Development's P/S?

Following Henan Huaying Agricultural Development's share price tumble, its P/S is just clinging on to the industry median P/S. 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 Henan Huaying Agricultural Development 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. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Henan Huaying Agricultural Development, and understanding should be part of your investment process.

If you're unsure about the strength of Henan Huaying Agricultural Development'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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