Shantou Wanshun New Material Group Co., Ltd. (SZSE:300057) shareholders are no doubt pleased to see that the share price has bounced 27% in the last month, although it is still struggling to make up recently lost ground. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 28% in the last twelve months.

Although its price has surged higher, when close to half the companies operating in China's Packaging industry have price-to-sales ratios (or "P/S") above 2x, you may still consider Shantou Wanshun New Material Group as an enticing stock to check out with its 1x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

What Does Shantou Wanshun New Material Group's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Shantou Wanshun New Material Group over the last year, which is not ideal at all. Perhaps the market believes the recent revenue performance isn't good enough to keep up the industry, causing the P/S ratio to suffer. Those who are bullish on Shantou Wanshun New Material Group will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

Is There Any Revenue Growth Forecasted For Shantou Wanshun New Material Group?

In order to justify its P/S ratio, Shantou Wanshun New Material Group would need to produce sluggish growth that's trailing 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 4.2%. Regardless, revenue has managed to lift by a handy 10% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

This is in contrast to the rest of the industry, which is expected to grow by 19% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Shantou Wanshun New Material Group 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 Bottom Line On Shantou Wanshun New Material Group's P/S

The latest share price surge wasn't enough to lift Shantou Wanshun New Material Group's P/S close to the industry median. 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.

Our examination of Shantou Wanshun New Material Group confirms that the company's revenue trends over the past three-year years are a key factor in its low price-to-sales ratio, as we suspected, given they fall short of current industry expectations. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

You should always think about risks. Case in point, we've spotted 4 warning signs for Shantou Wanshun New Material Group you should be aware of, and 1 of them is a bit unpleasant.

If you're unsure about the strength of Shantou Wanshun New Material Group'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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