Nanjing Red Sun Co.,Ltd. (SZSE:000525) shares have had a really impressive month, gaining 28% after a shaky period beforehand. Unfortunately, despite the strong performance over the last month, the full year gain of 2.6% isn't as attractive.

In spite of the firm bounce in price, Nanjing Red SunLtd may still be sending buy signals at present with its price-to-sales (or "P/S") ratio of 1.4x, considering almost half of all companies in the Chemicals industry in China have P/S ratios greater than 2.1x and even P/S higher than 5x 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 Nanjing Red SunLtd's Recent Performance Look Like?

For example, consider that Nanjing Red SunLtd's financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the recent revenue performance isn't good enough to keep up the industry, causing the P/S ratio to suffer. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

Is There Any Revenue Growth Forecasted For Nanjing Red SunLtd?

The only time you'd be truly comfortable seeing a P/S as low as Nanjing Red SunLtd's is when the company's growth is on track to lag the industry.

Retrospectively, the last year delivered a frustrating 47% decrease to the company's top line. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 7.0% in total. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

This is in contrast to the rest of the industry, which is expected to grow by 25% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Nanjing Red SunLtd's P/S sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Bottom Line On Nanjing Red SunLtd's P/S

Nanjing Red SunLtd's stock price has surged recently, but its but its P/S still remains modest. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Nanjing Red SunLtd revealed its three-year revenue trends are contributing to its low P/S, given they look worse than current industry expectations. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

Before you take the next step, you should know about the 1 warning sign for Nanjing Red SunLtd that we have uncovered.

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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