Despite an already strong run, Zhongnongfa Seed Industry Group Co., Ltd. (SHSE:600313) shares have been powering on, with a gain of 28% in the last thirty days. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 2.4% in the last twelve months.

In spite of the firm bounce in price, Zhongnongfa Seed Industry Group may still be sending buy signals at present with its price-to-sales (or "P/S") ratio of 1.5x, considering almost half of all companies in the Chemicals industry in China have P/S ratios greater than 2.4x and even P/S higher than 5x aren't out of the ordinary. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

What Does Zhongnongfa Seed Industry Group's Recent Performance Look Like?

For instance, Zhongnongfa Seed Industry Group's receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future. 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.

How Is Zhongnongfa Seed Industry Group's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as low as Zhongnongfa Seed Industry Group's is when the company's growth is on track to lag the industry.

Retrospectively, the last year delivered a frustrating 6.3% decrease to the company's top line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 30% overall rise in revenue. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Comparing that to the industry, which is predicted to deliver 25% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

In light of this, it's understandable that Zhongnongfa Seed Industry Group'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.

The Key Takeaway

The latest share price surge wasn't enough to lift Zhongnongfa Seed Industry Group's P/S close to the industry median. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Zhongnongfa Seed Industry Group 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.

It is also worth noting that we have found 2 warning signs for Zhongnongfa Seed Industry Group that you need to take into consideration.

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.