Hubei Sanxia New Building Materials Co., Ltd. (SHSE:600293) shareholders won't be pleased to see that the share price has had a very rough month, dropping 25% and undoing the prior period's positive performance. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 11% share price drop.

In spite of the heavy fall in price, you could still be forgiven for feeling indifferent about Hubei Sanxia New Building Materials' P/S ratio of 1.5x, since the median price-to-sales (or "P/S") ratio for the Building industry in China is also close to 1.7x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

What Does Hubei Sanxia New Building Materials' P/S Mean For Shareholders?

For example, consider that Hubei Sanxia New Building Materials' financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is moderate because investors think the company might still do enough to be in line with the broader industry in the near future. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

How Is Hubei Sanxia New Building Materials' Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like Hubei Sanxia New Building Materials' is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered a frustrating 17% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 17% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 24% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's somewhat alarming that Hubei Sanxia New Building Materials' P/S sits in line with the majority of other companies. 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 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 Bottom Line On Hubei Sanxia New Building Materials' P/S

Following Hubei Sanxia New Building Materials' 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 find it unexpected that Hubei Sanxia New Building Materials trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Having said that, be aware Hubei Sanxia New Building Materials is showing 1 warning sign in our investment analysis, you should know about.

If you're unsure about the strength of Hubei Sanxia New Building Materials' 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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