Anhui Guofeng New Materials Co., Ltd. (SZSE:000859) shares have had a horrible month, losing 31% after a relatively good period beforehand. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 41% share price drop.

Even after such a large drop in price, it's still not a stretch to say that Anhui Guofeng New Materials' price-to-sales (or "P/S") ratio of 1.3x right now seems quite "middle-of-the-road" compared to the Packaging industry in China, where the median P/S ratio is around 1.6x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

How Has Anhui Guofeng New Materials Performed Recently?

As an illustration, revenue has deteriorated at Anhui Guofeng New Materials over the last year, which is not ideal at all. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. 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.

Is There Some Revenue Growth Forecasted For Anhui Guofeng New Materials?

In order to justify its P/S ratio, Anhui Guofeng New Materials would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a frustrating 9.0% decrease to the company's top line. However, a few very strong years before that means that it was still able to grow revenue by an impressive 33% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 19% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's curious that Anhui Guofeng New Materials' P/S sits in line with the majority of other companies. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What Does Anhui Guofeng New Materials' P/S Mean For Investors?

With its share price dropping off a cliff, the P/S for Anhui Guofeng New Materials looks to be in line with the rest of the Packaging industry. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Anhui Guofeng New Materials' average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. Right now we are uncomfortable with the P/S as this revenue performance isn't likely to support a more positive sentiment for long. Unless the recent medium-term conditions improve, it's hard to accept the current share price as fair value.

It is also worth noting that we have found 2 warning signs for Anhui Guofeng New Materials (1 is concerning!) that you need to take into consideration.

If you're unsure about the strength of Anhui Guofeng New 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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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.

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