Henan BCCY Environmental Energy Co., Ltd (SZSE:300614) shareholders are no doubt pleased to see that the share price has bounced 30% in the last month, although it is still struggling to make up recently lost ground. Still, the 30-day jump doesn't change the fact that longer term shareholders have seen their stock decimated by the 53% share price drop in the last twelve months.

After such a large jump in price, given around half the companies in China's Renewable Energy industry have price-to-sales ratios (or "P/S") below 2.2x, you may consider Henan BCCY Environmental Energy as a stock to avoid entirely with its 4.9x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

What Does Henan BCCY Environmental Energy's P/S Mean For Shareholders?

For instance, Henan BCCY Environmental Energy's receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Do Revenue Forecasts Match The High P/S Ratio?

Henan BCCY Environmental Energy'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.

Retrospectively, the last year delivered a frustrating 12% decrease to the company's top line. As a result, revenue from three years ago have also fallen 20% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 12,130% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that Henan BCCY Environmental Energy 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 Bottom Line On Henan BCCY Environmental Energy's P/S

Shares in Henan BCCY Environmental Energy have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

We've established that Henan BCCY Environmental Energy currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Henan BCCY Environmental Energy (1 is significant) you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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