The Chengbang Eco-Environment Co.,Ltd. (SHSE:603316) share price has done very well over the last month, posting an excellent gain of 33%. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 27% over that time.

Following the firm bounce in price, you could be forgiven for thinking Chengbang Eco-EnvironmentLtd is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 3.8x, considering almost half the companies in China's Construction industry have P/S ratios below 1x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

What Does Chengbang Eco-EnvironmentLtd's P/S Mean For Shareholders?

For instance, Chengbang Eco-EnvironmentLtd's receding revenue in recent times would have to be some food for thought. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. If not, then existing shareholders may be quite nervous about the viability of the share price.

How Is Chengbang Eco-EnvironmentLtd's Revenue Growth Trending?

Chengbang Eco-EnvironmentLtd's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 43%. This means it has also seen a slide in revenue over the longer-term as revenue is down 73% 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 15% shows it's an unpleasant look.

With this information, we find it concerning that Chengbang Eco-EnvironmentLtd is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very 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 Key Takeaway

Chengbang Eco-EnvironmentLtd's P/S has grown nicely over the last month thanks to a handy boost in the share price. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Chengbang Eco-EnvironmentLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Chengbang Eco-EnvironmentLtd (2 can't be ignored) you should be aware of.

If these risks are making you reconsider your opinion on Chengbang Eco-EnvironmentLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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