The Suzhou Hycan Holdings Co., Ltd. (SZSE:002787) share price has softened a substantial 26% over the previous 30 days, handing back much of the gains the stock has made lately. The recent drop has obliterated the annual return, with the share price now down 4.1% over that longer period.

Even after such a large drop in price, it would still be understandable if you think Suzhou Hycan Holdings is a stock with good investment prospects with a price-to-sales ratios (or "P/S") of 1.1x, considering almost half the companies in China's Packaging industry have P/S ratios above 2x. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

What Does Suzhou Hycan Holdings' P/S Mean For Shareholders?

Revenue has risen at a steady rate over the last year for Suzhou Hycan Holdings, which is generally not a bad outcome. It might be that many expect the respectable revenue performance to degrade, 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.

Do Revenue Forecasts Match The Low P/S Ratio?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Suzhou Hycan Holdings' to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 7.0% last year. Revenue has also lifted 11% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 15% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in consideration, it's easy to understand why Suzhou Hycan Holdings' P/S falls short of the mark set by its industry peers. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

What We Can Learn From Suzhou Hycan Holdings' P/S?

The southerly movements of Suzhou Hycan Holdings' shares means its P/S is now sitting at a pretty low level. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of Suzhou Hycan Holdings 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.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Suzhou Hycan Holdings (of which 1 is concerning!) you should know about.

If these risks are making you reconsider your opinion on Suzhou Hycan Holdings, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.