There wouldn't be many who think Hainan Development HoldingsNanhai Co., Ltd.'s (SZSE:002163) price-to-sales (or "P/S") ratio of 1.9x is worth a mention when the median P/S for the Construction industry in China is similar at about 1.4x. 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.

Check out our latest analysis for Hainan Development HoldingsNanhai

What Does Hainan Development HoldingsNanhai's P/S Mean For Shareholders?

It looks like revenue growth has deserted Hainan Development HoldingsNanhai recently, which is not something to boast about. Perhaps the market believes the recent run-of-the-mill revenue performance isn't enough to outperform the industry, which has kept the P/S muted. 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.

How Is Hainan Development HoldingsNanhai's Revenue Growth Trending?

Hainan Development HoldingsNanhai'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 virtually the same number to the company's top line as the year before. Whilst it's an improvement, it wasn't enough to get the company out of the hole it was in, with revenue down 9.6% overall from three years ago. 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 29% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Hainan Development HoldingsNanhai's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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.

The Final Word

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 Hainan Development HoldingsNanhai 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. 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.

Before you settle on your opinion, we've discovered 1 warning sign for Hainan Development HoldingsNanhai that you should be aware of.

If you're unsure about the strength of Hainan Development HoldingsNanhai's 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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