Unfortunately for some shareholders, the Huafon Microfibre (Shanghai) Co., Ltd. (SZSE:300180) share price has dived 25% in the last thirty days, prolonging recent pain. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 22% share price drop.

Since its price has dipped substantially, Huafon Microfibre (Shanghai) may be sending buy signals at present with its price-to-sales (or "P/S") ratio of 1.3x, considering almost half of all companies in the Chemicals industry in China have P/S ratios greater than 2x and even P/S higher than 4x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

What Does Huafon Microfibre (Shanghai)'s Recent Performance Look Like?

For example, consider that Huafon Microfibre (Shanghai)'s financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

Is There Any Revenue Growth Forecasted For Huafon Microfibre (Shanghai)?

The only time you'd be truly comfortable seeing a P/S as low as Huafon Microfibre (Shanghai)'s is when the company's growth is on track to lag the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 2.4%. Still, the latest three year period has seen an excellent 40% overall rise in revenue, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 27% shows it's noticeably less attractive.

With this in consideration, it's easy to understand why Huafon Microfibre (Shanghai)'s P/S falls short of the mark set by its industry peers. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Bottom Line On Huafon Microfibre (Shanghai)'s P/S

The southerly movements of Huafon Microfibre (Shanghai)'s shares means its P/S is now sitting at a pretty low level. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Huafon Microfibre (Shanghai) confirms that the company's revenue trends over the past three-year years are a key factor in its low price-to-sales ratio, as we suspected, given they fall short of current industry expectations. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

You should always think about risks. Case in point, we've spotted 1 warning sign for Huafon Microfibre (Shanghai) you should be aware of.

If you're unsure about the strength of Huafon Microfibre (Shanghai)'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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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.