Shanghai SK Petroleum & Chemical Equipment Corporation Ltd. (SZSE:002278) shareholders that were waiting for something to happen have been dealt a blow with a 28% 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 22% share price drop.

Although its price has dipped substantially, you could still be forgiven for feeling indifferent about Shanghai SK Petroleum & Chemical Equipment's P/S ratio of 2.2x, since the median price-to-sales (or "P/S") ratio for the Energy Services industry in China is also close to 2x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

What Does Shanghai SK Petroleum & Chemical Equipment's Recent Performance Look Like?

The recent revenue growth at Shanghai SK Petroleum & Chemical Equipment would have to be considered satisfactory if not spectacular. It might be that many expect the respectable revenue performance to only match most other companies over the coming period, which has kept the P/S from rising. Those who are bullish on Shanghai SK Petroleum & Chemical Equipment will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

What Are Revenue Growth Metrics Telling Us About The P/S?

In order to justify its P/S ratio, Shanghai SK Petroleum & Chemical Equipment would need to produce growth that's similar to the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 6.9%. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 3.5% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 18% shows it's an unpleasant look.

In light of this, it's somewhat alarming that Shanghai SK Petroleum & Chemical Equipment's P/S sits in line with the majority of other companies. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

The Key Takeaway

Shanghai SK Petroleum & Chemical Equipment's plummeting stock price has brought its P/S back to a similar region as the rest of the industry. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our look at Shanghai SK Petroleum & Chemical Equipment revealed its shrinking revenues over the medium-term haven't impacted the P/S as much as we anticipated, given the industry is set to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more 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.

Plus, you should also learn about this 1 warning sign we've spotted with Shanghai SK Petroleum & Chemical Equipment.

If you're unsure about the strength of Shanghai SK Petroleum & Chemical Equipment'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.