Wuxi Hodgen Technology Co., Ltd. (SZSE:300279) shareholders that were waiting for something to happen have been dealt a blow with a 27% share price drop in the last month. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 12% in that time.

After such a large drop in price, Wuxi Hodgen Technology may be sending very bullish signals at the moment with its price-to-sales (or "P/S") ratio of 1.2x, since almost half of all companies in the Electronic industry in China have P/S ratios greater than 3.3x and even P/S higher than 7x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

How Has Wuxi Hodgen Technology Performed Recently?

Wuxi Hodgen Technology has been doing a decent job lately as it's been growing revenue at a reasonable pace. It might be that many expect the respectable revenue performance to degrade, which has repressed the P/S. Those who are bullish on Wuxi Hodgen Technology will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Is There Any Revenue Growth Forecasted For Wuxi Hodgen Technology?

The only time you'd be truly comfortable seeing a P/S as depressed as Wuxi Hodgen Technology's is when the company's growth is on track to lag the industry decidedly.

Retrospectively, the last year delivered a decent 2.9% gain to the company's revenues. Revenue has also lifted 29% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 61% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Wuxi Hodgen Technology's P/S sits below the majority of other companies. 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 Final Word

Having almost fallen off a cliff, Wuxi Hodgen Technology's share price has pulled its P/S way down as well. 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 Wuxi Hodgen Technology 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.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Wuxi Hodgen Technology with six simple checks will allow you to discover any risks that could be an issue.

If these risks are making you reconsider your opinion on Wuxi Hodgen Technology, 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.