The Gansu Huangtai Wine-Marketing Industry Co.,Ltd (SZSE:000995) share price has fared very poorly over the last month, falling by a substantial 27%. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 52% loss during that time.
Although its price has dipped substantially, when almost half of the companies in China's Beverage industry have price-to-sales ratios (or "P/S") below 5x, you may still consider Gansu Huangtai Wine-Marketing IndustryLtd as a stock not worth researching with its 9.7x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.
SZSE:000995 Price to Sales Ratio vs Industry June 6th 2024
What Does Gansu Huangtai Wine-Marketing IndustryLtd's Recent Performance Look Like?
Gansu Huangtai Wine-Marketing IndustryLtd has been doing a good job lately as it's been growing revenue at a solid pace. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors' willingness to pay up for the stock. If not, then existing shareholders may be a little nervous about the viability of the share price.
Although there are no analyst estimates available for Gansu Huangtai Wine-Marketing IndustryLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
Do Revenue Forecasts Match The High P/S Ratio?
Gansu Huangtai Wine-Marketing IndustryLtd's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.
Taking a look back first, we see that the company managed to grow revenues by a handy 7.6% last year. The latest three year period has also seen an excellent 44% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing revenues over that time.
Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 16% shows it's noticeably less attractive.
With this in mind, we find it worrying that Gansu Huangtai Wine-Marketing IndustryLtd's P/S exceeds that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. 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.
What We Can Learn From Gansu Huangtai Wine-Marketing IndustryLtd's P/S?
Even after such a strong price drop, Gansu Huangtai Wine-Marketing IndustryLtd's P/S still exceeds the industry median significantly. 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 Gansu Huangtai Wine-Marketing IndustryLtd revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.
The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Gansu Huangtai Wine-Marketing IndustryLtd with six simple checks on some of these key factors.
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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