The Hunan Zhenghong Science and Technology Develop Co.,Ltd. (SZSE:000702) share price has fared very poorly over the last month, falling by a substantial 29%. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 26% in that time.

Even after such a large drop in price, you could still be forgiven for feeling indifferent about Hunan Zhenghong Science and Technology DevelopLtd's P/S ratio of 1.2x, since the median price-to-sales (or "P/S") ratio for the Food industry in China is also close to 1.6x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

What Does Hunan Zhenghong Science and Technology DevelopLtd's P/S Mean For Shareholders?

For example, consider that Hunan Zhenghong Science and Technology DevelopLtd's financial performance has been pretty ordinary lately as revenue growth is non-existent. One possibility is that the P/S is moderate because investors think this benign revenue growth rate might not be enough to outperform the broader industry in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

How Is Hunan Zhenghong Science and Technology DevelopLtd's Revenue Growth Trending?

In order to justify its P/S ratio, Hunan Zhenghong Science and Technology DevelopLtd would need to produce growth that's similar to the industry.

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. Still, the latest three year period has seen an excellent 44% overall rise in revenue, in spite of its uninspiring short-term performance. Accordingly, shareholders will be pleased, but also have some questions to ponder about the last 12 months.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 16% shows it's noticeably less attractive.

In light of this, it's curious that Hunan Zhenghong Science and Technology DevelopLtd's P/S sits in line with the majority of other companies. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

The Bottom Line On Hunan Zhenghong Science and Technology DevelopLtd's P/S

With its share price dropping off a cliff, the P/S for Hunan Zhenghong Science and Technology DevelopLtd looks to be in line with the rest of the Food 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.

We've established that Hunan Zhenghong Science and Technology DevelopLtd's average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. Right now we are uncomfortable with the P/S as this revenue performance isn't likely to support a more positive sentiment for long. Unless the recent medium-term conditions improve, it's hard to accept the current share price as fair value.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Hunan Zhenghong Science and Technology DevelopLtd (at least 1 which is potentially serious), and understanding them should be part of your investment process.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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