You may think that with a price-to-sales (or "P/S") ratio of 1.3x Jiangsu ChengXing Phosph-Chemicals Co., Ltd. (SHSE:600078) is a stock worth checking out, seeing as almost half of all the Chemicals companies in China have P/S ratios greater than 2.3x and even P/S higher than 5x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

Check out our latest analysis for Jiangsu ChengXing Phosph-Chemicals

What Does Jiangsu ChengXing Phosph-Chemicals' P/S Mean For Shareholders?

For example, consider that Jiangsu ChengXing Phosph-Chemicals' financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future. Those who are bullish on Jiangsu ChengXing Phosph-Chemicals 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 Low P/S Ratio?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Jiangsu ChengXing Phosph-Chemicals' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 13% decrease to the company's top line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 12% overall rise in revenue. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

This is in contrast to the rest of the industry, which is expected to grow by 30% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in consideration, it's easy to understand why Jiangsu ChengXing Phosph-Chemicals' P/S falls short of the mark set by its industry peers. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

What Does Jiangsu ChengXing Phosph-Chemicals' P/S Mean For Investors?

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.

As we suspected, our examination of Jiangsu ChengXing Phosph-Chemicals revealed its three-year revenue trends are contributing to its low P/S, given they look worse than current industry expectations. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Jiangsu ChengXing Phosph-Chemicals (of which 1 shouldn't be ignored!) you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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