Hualan Group Co., Ltd. (SZSE:301027) shareholders won't be pleased to see that the share price has had a very rough month, dropping 25% and undoing the prior period's positive performance. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 46% 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 0.9x, you may still consider Hualan Group as a stock to potentially avoid with its 1.6x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.
SZSE:301027 Price to Sales Ratio vs Industry July 23rd 2024
How Has Hualan Group Performed Recently?
For instance, Hualan Group's receding revenue in recent times would have to be some food for thought. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Hualan Group will help you shine a light on its historical performance.
Is There Enough Revenue Growth Forecasted For Hualan Group?
There's an inherent assumption that a company should outperform the industry for P/S ratios like Hualan Group's to be considered reasonable.
Retrospectively, the last year delivered a frustrating 15% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 42% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.
Comparing that to the industry, which is predicted to deliver 13% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.
With this information, we find it concerning that Hualan Group is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate 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.
The Key Takeaway
Despite the recent share price weakness, Hualan Group's P/S remains higher than most other companies in the industry. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
We've established that Hualan Group currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. 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.
Before you settle on your opinion, we've discovered 4 warning signs for Hualan Group (3 don't sit too well with us!) that you should be aware of.
It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).
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Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
Hualan Group Co., Ltd.(SZSE:301027)的股东们不会高兴地看到股价经历了非常艰难的一个月,下跌了25%,将先前的积极表现抵消了。事实上,股东们在过去的十二个月中已经持有股票,现在却面临着46%的股价下跌。