To the annoyance of some shareholders, China Zenith Chemical Group Limited (HKG:362) shares are down a considerable 31% in the last month, which continues a horrid run for the company. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 51% loss during that time.

After such a large drop in price, China Zenith Chemical Group may look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 0.5x, considering almost half of all companies in the Electric Utilities industry in Hong Kong have P/S ratios greater than 2.7x and even P/S higher than 12x aren't out of the ordinary. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for China Zenith Chemical Group

How China Zenith Chemical Group Has Been Performing

For example, consider that China Zenith Chemical Group's financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the recent revenue performance isn't good enough to keep up the industry, causing the P/S ratio to suffer. If you 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.

Is There Any Revenue Growth Forecasted For China Zenith Chemical Group?

In order to justify its P/S ratio, China Zenith Chemical Group would need to produce anemic growth that's substantially 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 73%. This means it has also seen a slide in revenue over the longer-term as revenue is down 48% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

This is in contrast to the rest of the industry, which is expected to decline by 0.1% over the next year, or less than the company's recent medium-term annualised revenue decline.

With this in consideration, it's no surprise that China Zenith Chemical Group's P/S falls short of its industry peers. However, when revenue shrink rapidly P/S often shrinks too, which could set up shareholders for future disappointment regardless. Even just maintaining these prices will be difficult to achieve as recent revenue trends are already weighing down the shares heavily.

What Does China Zenith Chemical Group's P/S Mean For Investors?

China Zenith Chemical Group's P/S looks about as weak as its stock price lately. 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.

As we suspected, our examination of China Zenith Chemical Group revealed its sharp three-year contraction in revenue is contributing to its low P/S, given the industry is set to shrink less severely. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. However, we're still cautious about the company's ability to prevent an acceleration of its recent medium-term course and resist even greater pain to its business from the broader industry turmoil. In the meantime, unless the company's relative performance improves, the share price will hit a barrier around these levels.

It is also worth noting that we have found 5 warning signs for China Zenith Chemical Group that you need to take into consideration.

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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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.