Shenzhen Dynanonic Co., Ltd (SZSE:300769) shareholders would be excited to see that the share price has had a great month, posting a 61% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 48% over that time.

Even after such a large jump in price, Shenzhen Dynanonic may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 0.9x, since almost half of all companies in the Chemicals industry in China have P/S ratios greater than 2.2x and even P/S higher than 5x are not unusual. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

How Shenzhen Dynanonic Has Been Performing

Shenzhen Dynanonic could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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

There's an inherent assumption that a company should underperform the industry for P/S ratios like Shenzhen Dynanonic's to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 48%. Spectacularly, three year revenue growth has ballooned by several orders of magnitude, despite the drawbacks experienced in the last 12 months. Accordingly, shareholders will be pleased, but also have some serious questions to ponder about the last 12 months.

Turning to the outlook, the next year should bring diminished returns, with revenue decreasing 0.3% as estimated by the ten analysts watching the company. That's not great when the rest of the industry is expected to grow by 21%.

With this in consideration, we find it intriguing that Shenzhen Dynanonic's P/S is closely matching its industry peers. However, shrinking revenues are unlikely to lead to a stable P/S over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

What We Can Learn From Shenzhen Dynanonic's P/S?

Despite Shenzhen Dynanonic's share price climbing recently, its P/S still lags most other companies. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

It's clear to see that Shenzhen Dynanonic maintains its low P/S on the weakness of its forecast for sliding revenue, as expected. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

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

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.