Kunming Yunnei Power Co.,Ltd. (SZSE:000903) shares have retraced a considerable 29% in the last month, reversing a fair amount of their solid recent performance. Indeed, the recent drop has reduced its annual gain to a relatively sedate 3.4% over the last twelve months.

Following the heavy fall in price, Kunming Yunnei PowerLtd's price-to-sales (or "P/S") ratio of 1.1x might make it look like a strong buy right now compared to the wider Machinery industry in China, where around half of the companies have P/S ratios above 3.2x and even P/S above 6x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

See our latest analysis for Kunming Yunnei PowerLtd

What Does Kunming Yunnei PowerLtd's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Kunming Yunnei PowerLtd over the last year, which is not ideal at all. Perhaps the market believes the recent revenue performance isn't good enough to keep up the industry, causing the P/S ratio to suffer. 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 out of favour.

What Are Revenue Growth Metrics Telling Us About The Low P/S?

There's an inherent assumption that a company should far underperform the industry for P/S ratios like Kunming Yunnei PowerLtd's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 24% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 50% in total over the last three years. 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 30% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we are not surprised that Kunming Yunnei PowerLtd is trading at a P/S lower than the industry. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

What Does Kunming Yunnei PowerLtd's P/S Mean For Investors?

Kunming Yunnei PowerLtd's P/S looks about as weak as its stock price lately. 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.

Our examination of Kunming Yunnei PowerLtd confirms that the company's shrinking revenue over the past medium-term is a key factor in its low price-to-sales ratio, given the industry is projected to grow. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

You should always think about risks. Case in point, we've spotted 2 warning signs for Kunming Yunnei PowerLtd you should be aware of.

If these risks are making you reconsider your opinion on Kunming Yunnei PowerLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.