With a price-to-sales (or "P/S") ratio of 0.4x Hengli Petrochemical Co.,Ltd. (SHSE:600346) may be sending bullish signals at the moment, given that almost half of all the Chemicals companies in China have P/S ratios greater than 2.4x and even P/S higher than 6x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

View our latest analysis for Hengli PetrochemicalLtd

What Does Hengli PetrochemicalLtd's P/S Mean For Shareholders?

There hasn't been much to differentiate Hengli PetrochemicalLtd's and the industry's revenue growth lately. One possibility is that the P/S ratio is low because investors think this modest revenue performance may begin to slide. If you like the company, you'd be hoping this isn't the case so that you could pick up some stock while it's out of favour.

How Is Hengli PetrochemicalLtd's Revenue Growth Trending?

Hengli PetrochemicalLtd's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 3.8%. This was backed up an excellent period prior to see revenue up by 76% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenues over that time.

Looking ahead now, revenue is anticipated to climb by 11% during the coming year according to the analysts following the company. That's shaping up to be materially lower than the 29% growth forecast for the broader industry.

In light of this, it's understandable that Hengli PetrochemicalLtd's P/S sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From Hengli PetrochemicalLtd's P/S?

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.

As we suspected, our examination of Hengli PetrochemicalLtd's analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Hengli PetrochemicalLtd (at least 1 which can't be ignored), and understanding them should be part of your investment process.

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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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.