Tian Jin Bohai Chemical Co.,Ltd. (SHSE:600800) shares have continued their recent momentum with a 28% gain in the last month alone. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 19% over that time.
Even after such a large jump in price, Tian Jin Bohai ChemicalLtd may still be sending very bullish signals at the moment with its price-to-sales (or "P/S") ratio of 0.8x, since almost half of all companies in the Electronic industry in China have P/S ratios greater than 4.5x and even P/S higher than 9x are not unusual. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.
How Tian Jin Bohai ChemicalLtd Has Been Performing
As an illustration, revenue has deteriorated at Tian Jin Bohai ChemicalLtd over the last year, which is not ideal at all. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. Those who are bullish on Tian Jin Bohai ChemicalLtd will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.
Although there are no analyst estimates available for Tian Jin Bohai ChemicalLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.How Is Tian Jin Bohai ChemicalLtd's Revenue Growth Trending?
The only time you'd be truly comfortable seeing a P/S as depressed as Tian Jin Bohai ChemicalLtd's is when the company's growth is on track to lag the industry decidedly.
Retrospectively, the last year delivered a frustrating 21% decrease to the company's top line. This has erased any of its gains during the last three years, with practically no change in revenue being achieved in total. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.
This is in contrast to the rest of the industry, which is expected to grow by 27% over the next year, materially higher than the company's recent medium-term annualised growth rates.
With this information, we can see why Tian Jin Bohai ChemicalLtd is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.
What Does Tian Jin Bohai ChemicalLtd's P/S Mean For Investors?
Even after such a strong price move, Tian Jin Bohai ChemicalLtd's P/S still trails the rest of the industry. 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.
Our examination of Tian Jin Bohai ChemicalLtd 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. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Tian Jin Bohai ChemicalLtd, and understanding should be part of your investment process.
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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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.
