To the annoyance of some shareholders, Sunstone Development Co., Ltd. (SHSE:603612) shares are down a considerable 31% in the last month, which continues a horrid run for the company. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 64% loss during that time.

After such a large drop in price, Sunstone Development may be sending buy signals at present with its price-to-sales (or "P/S") ratio of 0.3x, considering almost half of all companies in the Chemicals industry in China have P/S ratios greater than 1.9x and even P/S higher than 4x aren't out of the ordinary. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

What Does Sunstone Development's P/S Mean For Shareholders?

With revenue growth that's superior to most other companies of late, Sunstone Development has been doing relatively well. Perhaps the market is expecting future revenue performance to dive, which has kept the P/S suppressed. 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 out of favour.

How Is Sunstone Development's Revenue Growth Trending?

Sunstone Development's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 6.4% last year. This was backed up an excellent period prior to see revenue up by 223% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 19% as estimated by the six analysts watching the company. That's shaping up to be materially lower than the 26% growth forecast for the broader industry.

With this in consideration, its clear as to why Sunstone Development's P/S is falling short industry peers. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

Sunstone Development's recently weak share price has pulled its P/S back below other Chemicals companies. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As expected, our analysis of Sunstone Development's analyst forecasts confirms that the company's underwhelming revenue outlook is a major contributor to its low P/S. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. It's hard to see the share price rising strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Sunstone Development (2 are a bit unpleasant) 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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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.