Changzhou Tronly New Electronic Materials Co., Ltd. (SZSE:300429) shareholders that were waiting for something to happen have been dealt a blow with a 32% share price drop in the last month. The last month has meant the stock is now only up 8.9% during the last year.

In spite of the heavy fall in price, you could still be forgiven for thinking Changzhou Tronly New Electronic Materials is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 5.8x, considering almost half the companies in China's Chemicals industry have P/S ratios below 2x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Changzhou Tronly New Electronic Materials

What Does Changzhou Tronly New Electronic Materials' Recent Performance Look Like?

For instance, Changzhou Tronly New Electronic Materials' receding revenue in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

How Is Changzhou Tronly New Electronic Materials' Revenue Growth Trending?

Changzhou Tronly New Electronic Materials' P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 24%. This has erased any of its gains during the last three years, with practically no change in revenue being achieved in total. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

Comparing that to the industry, which is predicted to deliver 27% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this information, we find it concerning that Changzhou Tronly New Electronic Materials is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Bottom Line On Changzhou Tronly New Electronic Materials' P/S

A significant share price dive has done very little to deflate Changzhou Tronly New Electronic Materials' very lofty P/S. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Changzhou Tronly New Electronic Materials revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such 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.

It is also worth noting that we have found 3 warning signs for Changzhou Tronly New Electronic Materials that you need to take into consideration.

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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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.