The Huatian Hotel Group Co.,Ltd. (SZSE:000428) share price has fared very poorly over the last month, falling by a substantial 26%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 42% share price drop.

Even after such a large drop in price, there still wouldn't be many who think Huatian Hotel GroupLtd's price-to-sales (or "P/S") ratio of 5.2x is worth a mention when it essentially matches the median P/S in China's Hospitality industry. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

How Has Huatian Hotel GroupLtd Performed Recently?

Revenue has risen firmly for Huatian Hotel GroupLtd recently, which is pleasing to see. One possibility is that the P/S is moderate because investors think this respectable revenue growth 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.

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

There's an inherent assumption that a company should be matching the industry for P/S ratios like Huatian Hotel GroupLtd's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 16% gain to the company's top line. Revenue has also lifted 6.7% in aggregate from three years ago, mostly 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 37% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's curious that Huatian Hotel GroupLtd'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 Final Word

Huatian Hotel GroupLtd's plummeting stock price has brought its P/S back to a similar region as the rest of the industry. 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.

Our examination of Huatian Hotel GroupLtd revealed its poor three-year revenue trends aren't resulting in a lower P/S as per our expectations, given they look worse than current industry outlook. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. If recent medium-term revenue trends continue, the probability of a share price decline will become quite substantial, placing shareholders at risk.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Huatian Hotel GroupLtd you should know about.

If you're unsure about the strength of Huatian Hotel GroupLtd'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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