To the annoyance of some shareholders, EGing Photovoltaic Technology Co.,Ltd. (SHSE:600537) shares are down a considerable 31% in the last month, which continues a horrid run for the company. For any long-term shareholders, the last month ends a year to forget by locking in a 63% share price decline.

After such a large drop in price, EGing Photovoltaic TechnologyLtd may be sending very bullish signals at the moment with its price-to-sales (or "P/S") ratio of 0.4x, since almost half of all companies in the Semiconductor industry in China have P/S ratios greater than 6.2x and even P/S higher than 11x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.

How EGing Photovoltaic TechnologyLtd Has Been Performing

For instance, EGing Photovoltaic TechnologyLtd's receding revenue in recent times would have to be some food for thought. Perhaps the market believes the recent revenue performance isn't good enough to keep up the industry, causing the P/S ratio to suffer. 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.

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

There's an inherent assumption that a company should far underperform the industry for P/S ratios like EGing Photovoltaic TechnologyLtd's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 33% decrease to the company's top line. Still, the latest three year period has seen an excellent 51% 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.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 35% shows it's noticeably less attractive.

In light of this, it's understandable that EGing Photovoltaic TechnologyLtd'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 Key Takeaway

Shares in EGing Photovoltaic TechnologyLtd have plummeted and its P/S has followed suit. 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 EGing Photovoltaic TechnologyLtd confirms that the company's revenue trends over the past three-year years are a key factor in its low price-to-sales ratio, as we suspected, given they fall short of 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. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for EGing Photovoltaic TechnologyLtd with six simple checks.

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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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.

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