The Hangzhou Gaoxin Materials Technology Co., Ltd. (SZSE:300478) share price has fared very poorly over the last month, falling by a substantial 27%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 24% share price drop.

Although its price has dipped substantially, there still wouldn't be many who think Hangzhou Gaoxin Materials Technology's price-to-sales (or "P/S") ratio of 2.4x is worth a mention when the median P/S in China's Chemicals industry is similar at about 2x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

What Does Hangzhou Gaoxin Materials Technology's P/S Mean For Shareholders?

The recent revenue growth at Hangzhou Gaoxin Materials Technology would have to be considered satisfactory if not spectacular. Perhaps the expectation moving forward is that the revenue growth will track in line with the wider industry for the near term, which has kept the P/S subdued. 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 not quite in favour.

Do Revenue Forecasts Match The P/S Ratio?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Hangzhou Gaoxin Materials Technology's to be considered reasonable.

If we review the last year of revenue growth, the company posted a worthy increase of 3.7%. Still, lamentably revenue has fallen 4.7% in aggregate from three years ago, which is disappointing. 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 23% 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 Hangzhou Gaoxin Materials Technology is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

What Does Hangzhou Gaoxin Materials Technology's P/S Mean For Investors?

With its share price dropping off a cliff, the P/S for Hangzhou Gaoxin Materials Technology looks to be in line with the rest of the Chemicals industry. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We find it unexpected that Hangzhou Gaoxin Materials Technology 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. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Having said that, be aware Hangzhou Gaoxin Materials Technology is showing 3 warning signs in our investment analysis, and 2 of those are a bit unpleasant.

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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