Changzhou Tiansheng New Materials Group Co., Ltd. (SZSE:300169) shareholders that were waiting for something to happen have been dealt a blow with a 29% share price drop in the last month. Longer-term, the stock has been solid despite a difficult 30 days, gaining 12% in the last year.

Although its price has dipped substantially, there still wouldn't be many who think Changzhou Tiansheng New Materials Group's price-to-sales (or "P/S") ratio of 2.5x is worth a mention when the median P/S in China's Chemicals industry is similar at about 2x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

How Changzhou Tiansheng New Materials Group Has Been Performing

Revenue has risen at a steady rate over the last year for Changzhou Tiansheng New Materials Group, which is generally not a bad outcome. It might be that many expect the respectable revenue performance to only match most other companies over the coming period, which has kept the P/S from rising. Those who are bullish on Changzhou Tiansheng New Materials Group will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Do Revenue Forecasts Match The P/S Ratio?

Changzhou Tiansheng New Materials Group's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

Retrospectively, the last year delivered a decent 6.5% gain to the company's revenues. Still, lamentably revenue has fallen 37% 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 Changzhou Tiansheng New Materials Group 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. 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 Key Takeaway

Following Changzhou Tiansheng New Materials Group's 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.

The fact that Changzhou Tiansheng New Materials Group currently trades at a P/S on par with the rest of the industry is surprising to us since its recent revenues have been in decline over the medium-term, all while the industry is set 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. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Changzhou Tiansheng New Materials Group you should know about.

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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