Wuxi Double Elephant Micro Fibre Material Co.,Ltd (SZSE:002395) shareholders won't be pleased to see that the share price has had a very rough month, dropping 51% and undoing the prior period's positive performance. The last month has meant the stock is now only up 4.8% during the last year.

In spite of the heavy fall in price, it's still not a stretch to say that Wuxi Double Elephant Micro Fibre MaterialLtd's price-to-sales (or "P/S") ratio of 1.9x right now seems quite "middle-of-the-road" compared to the Chemicals industry in China, where the median P/S ratio is around 1.7x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

How Has Wuxi Double Elephant Micro Fibre MaterialLtd Performed Recently?

Revenue has risen at a steady rate over the last year for Wuxi Double Elephant Micro Fibre MaterialLtd, which is generally not a bad outcome. 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. Those who are bullish on Wuxi Double Elephant Micro Fibre MaterialLtd will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Is There Some Revenue Growth Forecasted For Wuxi Double Elephant Micro Fibre MaterialLtd?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Wuxi Double Elephant Micro Fibre MaterialLtd's to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 6.1% last year. Revenue has also lifted 10% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 26% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this information, we find it interesting that Wuxi Double Elephant Micro Fibre MaterialLtd 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. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Bottom Line On Wuxi Double Elephant Micro Fibre MaterialLtd's P/S

Following Wuxi Double Elephant Micro Fibre MaterialLtd's share price tumble, its P/S is just clinging on to the industry median P/S. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Wuxi Double Elephant Micro Fibre MaterialLtd'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. If recent medium-term revenue trends continue, the probability of a share price decline will become quite substantial, placing shareholders at risk.

Having said that, be aware Wuxi Double Elephant Micro Fibre MaterialLtd is showing 2 warning signs in our investment analysis, you should know about.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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