The Chengbang Eco-Environment Co.,Ltd. (SHSE:603316) share price has fared very poorly over the last month, falling by a substantial 30%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 27% share price drop.

Even after such a large drop in price, given close to half the companies operating in China's Construction industry have price-to-sales ratios (or "P/S") below 1.1x, you may still consider Chengbang Eco-EnvironmentLtd as a stock to potentially avoid with its 2.1x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

How Chengbang Eco-EnvironmentLtd Has Been Performing

For example, consider that Chengbang Eco-EnvironmentLtd's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

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

Chengbang Eco-EnvironmentLtd's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 52%. The last three years don't look nice either as the company has shrunk revenue by 56% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 13% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Chengbang Eco-EnvironmentLtd's P/S exceeds that of its industry peers. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Bottom Line On Chengbang Eco-EnvironmentLtd's P/S

There's still some elevation in Chengbang Eco-EnvironmentLtd's P/S, even if the same can't be said for its share price recently. 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 Chengbang Eco-EnvironmentLtd revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It is also worth noting that we have found 3 warning signs for Chengbang Eco-EnvironmentLtd (2 are potentially serious!) that you need to take into consideration.

If you're unsure about the strength of Chengbang Eco-EnvironmentLtd'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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