Jiangsu Huahong Technology Co., Ltd. (SZSE:002645) shares have had a horrible month, losing 27% after a relatively good period beforehand. For any long-term shareholders, the last month ends a year to forget by locking in a 57% share price decline.

Since its price has dipped substantially, Jiangsu Huahong Technology's price-to-sales (or "P/S") ratio of 0.7x might make it look like a buy right now compared to the Machinery industry in China, where around half of the companies have P/S ratios above 2.5x and even P/S above 5x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

What Does Jiangsu Huahong Technology's P/S Mean For Shareholders?

Jiangsu Huahong Technology could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. If you still 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?

In order to justify its P/S ratio, Jiangsu Huahong Technology would need to produce sluggish growth that's trailing the industry.

Retrospectively, the last year delivered a frustrating 13% decrease to the company's top line. Even so, admirably revenue has lifted 167% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Shifting to the future, estimates from the sole analyst covering the company suggest revenue should grow by 25% over the next year. That's shaping up to be similar to the 28% growth forecast for the broader industry.

With this in consideration, we find it intriguing that Jiangsu Huahong Technology's P/S is lagging behind its industry peers. It may be that most investors are not convinced the company can achieve future growth expectations.

What We Can Learn From Jiangsu Huahong Technology's P/S?

The southerly movements of Jiangsu Huahong Technology's shares means its P/S is now sitting at a pretty low level. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've seen that Jiangsu Huahong Technology currently trades on a lower than expected P/S since its forecast growth is in line with the wider industry. The low P/S could be an indication that the revenue growth estimates are being questioned by the market. At least the risk of a price drop looks to be subdued, but investors seem to think future revenue could see some volatility.

You always need to take note of risks, for example - Jiangsu Huahong Technology has 1 warning sign we think you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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