Anhui Chaoyue Environmental Protection Technology Co., Ltd. (SZSE:301049) shareholders that were waiting for something to happen have been dealt a blow with a 27% share price drop in the last month. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 27% share price drop.

Even after such a large drop in price, when almost half of the companies in China's Commercial Services industry have price-to-sales ratios (or "P/S") below 2.7x, you may still consider Anhui Chaoyue Environmental Protection Technology as a stock not worth researching with its 6.6x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

How Has Anhui Chaoyue Environmental Protection Technology Performed Recently?

Revenue has risen firmly for Anhui Chaoyue Environmental Protection Technology recently, which is pleasing to see. Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Anhui Chaoyue Environmental Protection Technology's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 18% gain to the company's top line. However, this wasn't enough as the latest three year period has seen the company endure a nasty 20% drop in revenue in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

Comparing that to the industry, which is predicted to deliver 30% 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 Anhui Chaoyue Environmental Protection Technology is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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 Key Takeaway

A significant share price dive has done very little to deflate Anhui Chaoyue Environmental Protection Technology's 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.

We've established that Anhui Chaoyue Environmental Protection Technology currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Anhui Chaoyue Environmental Protection Technology that you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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