With a price-to-sales (or "P/S") ratio of 1.1x Shaanxi Xinghua Chemistry Co.,Ltd (SZSE:002109) may be sending bullish signals at the moment, given that almost half of all the Chemicals companies in China have P/S ratios greater than 2.3x and even P/S higher than 5x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.
How Has Shaanxi Xinghua ChemistryLtd Performed Recently?
The revenue growth achieved at Shaanxi Xinghua ChemistryLtd over the last year would be more than acceptable for most companies. It might be that many expect the respectable revenue performance to degrade substantially, which has repressed the P/S. 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.
We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Shaanxi Xinghua ChemistryLtd's earnings, revenue and cash flow.How Is Shaanxi Xinghua ChemistryLtd's Revenue Growth Trending?
The only time you'd be truly comfortable seeing a P/S as low as Shaanxi Xinghua ChemistryLtd's is when the company's growth is on track to lag the industry.
If we review the last year of revenue growth, the company posted a terrific increase of 20%. Pleasingly, revenue has also lifted 50% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.
Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 22% shows it's noticeably less attractive.
With this in consideration, it's easy to understand why Shaanxi Xinghua ChemistryLtd's P/S falls short of the mark set by its industry peers. 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 Final Word
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.
Our examination of Shaanxi Xinghua ChemistryLtd 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. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.
There are also other vital risk factors to consider and we've discovered 3 warning signs for Shaanxi Xinghua ChemistryLtd (2 make us uncomfortable!) that you should be aware of before investing here.
If you're unsure about the strength of Shaanxi Xinghua ChemistryLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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.
