Guizhou Chitianhua Co.,Ltd. (SHSE:600227) shareholders are no doubt pleased to see that the share price has bounced 26% in the last month, although it is still struggling to make up recently lost ground. Still, the 30-day jump doesn't change the fact that longer term shareholders have seen their stock decimated by the 51% share price drop in the last twelve months.

In spite of the firm bounce in price, Guizhou ChitianhuaLtd may still be sending buy signals at present with its price-to-sales (or "P/S") ratio of 1.1x, considering almost half of all companies in the Chemicals industry in China have P/S ratios greater than 1.8x and even P/S higher than 4x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

What Does Guizhou ChitianhuaLtd's P/S Mean For Shareholders?

For instance, Guizhou ChitianhuaLtd'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. Those who are bullish on Guizhou ChitianhuaLtd will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

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

Guizhou ChitianhuaLtd's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

Retrospectively, the last year delivered a frustrating 10% decrease to the company's top line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 5.1% overall rise in revenue. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 23% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Guizhou ChitianhuaLtd's P/S sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

What We Can Learn From Guizhou ChitianhuaLtd's P/S?

Guizhou ChitianhuaLtd's stock price has surged recently, but its but its P/S still remains modest. 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.

As we suspected, our examination of Guizhou ChitianhuaLtd revealed its three-year revenue trends are contributing to its low P/S, given they look worse than 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.

You always need to take note of risks, for example - Guizhou ChitianhuaLtd has 1 warning sign we think you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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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