Guizhou Zhenhua E-chem Inc. (SHSE:688707) shareholders would be excited to see that the share price has had a great month, posting a 35% gain and recovering from prior weakness. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 50% in the last twelve months.

In spite of the firm bounce in price, considering around half the companies operating in China's Electrical industry have price-to-sales ratios (or "P/S") above 2.1x, you may still consider Guizhou Zhenhua E-chem as an solid investment opportunity with its 1.3x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

How Has Guizhou Zhenhua E-chem Performed Recently?

Guizhou Zhenhua E-chem hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Is There Any Revenue Growth Forecasted For Guizhou Zhenhua E-chem?

In order to justify its P/S ratio, Guizhou Zhenhua E-chem would need to produce sluggish growth that's trailing the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 61%. Even so, admirably revenue has lifted 68% in aggregate from three years ago, notwithstanding the last 12 months. 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.

Turning to the outlook, the next year should bring diminished returns, with revenue decreasing 25% as estimated by the dual analysts watching the company. With the industry predicted to deliver 23% growth, that's a disappointing outcome.

With this in consideration, we find it intriguing that Guizhou Zhenhua E-chem's P/S is closely matching its industry peers. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Bottom Line On Guizhou Zhenhua E-chem's P/S

Despite Guizhou Zhenhua E-chem's share price climbing recently, its P/S still lags most other companies. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

With revenue forecasts that are inferior to the rest of the industry, it's no surprise that Guizhou Zhenhua E-chem's P/S is on the lower end of the spectrum. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless there's material change, it's hard to envision a situation where the stock price will rise drastically.

Before you settle on your opinion, we've discovered 3 warning signs for Guizhou Zhenhua E-chem (2 can't be ignored!) that you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.