China Dredging Environment Protection Holdings Limited (HKG:871) shares have had a really impressive month, gaining 42% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 84%.

Even after such a large jump in price, it would still be understandable if you think China Dredging Environment Protection Holdings is a stock with good investment prospects with a price-to-sales ratios (or "P/S") of 0.3x, considering almost half the companies in Hong Kong's Infrastructure industry have P/S ratios above 1.5x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

How China Dredging Environment Protection Holdings Has Been Performing

As an illustration, revenue has deteriorated at China Dredging Environment Protection Holdings over the last year, which is not ideal at all. One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future. Those who are bullish on China Dredging Environment Protection Holdings will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

Do Revenue Forecasts Match The Low P/S Ratio?

In order to justify its P/S ratio, China Dredging Environment Protection Holdings would need to produce sluggish growth that's trailing the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 2.7%. Still, the latest three year period has seen an excellent 31% overall rise in revenue, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

When compared to the industry's one-year growth forecast of 6.5%, the most recent medium-term revenue trajectory is noticeably more alluring

With this information, we find it odd that China Dredging Environment Protection Holdings is trading at a P/S lower than the industry. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Key Takeaway

The latest share price surge wasn't enough to lift China Dredging Environment Protection Holdings' P/S close to the industry median. 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.

We're very surprised to see China Dredging Environment Protection Holdings currently trading on a much lower than expected P/S since its recent three-year growth is higher than the wider industry forecast. When we see strong revenue with faster-than-industry growth, we assume there are some significant underlying risks to the company's ability to make money which is applying downwards pressure on the P/S ratio. It appears many are indeed anticipating revenue instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

Plus, you should also learn about these 2 warning signs we've spotted with China Dredging Environment Protection Holdings.

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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