Huarui Electrical Appliance Co.,Ltd. (SZSE:300626) shareholders won't be pleased to see that the share price has had a very rough month, dropping 25% and undoing the prior period's positive performance. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 22% share price drop.

In spite of the heavy fall in price, it's still not a stretch to say that Huarui Electrical ApplianceLtd's price-to-sales (or "P/S") ratio of 2.1x right now seems quite "middle-of-the-road" compared to the Electrical industry in China, where the median P/S ratio is around 2.2x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

How Has Huarui Electrical ApplianceLtd Performed Recently?

The revenue growth achieved at Huarui Electrical ApplianceLtd over the last year would be more than acceptable for most companies. Perhaps the market is expecting future revenue performance to only keep up with the broader industry, which has keeping the P/S in line with expectations. If that doesn't eventuate, then existing shareholders probably aren't too pessimistic about the future direction of the share price.

Is There Some Revenue Growth Forecasted For Huarui Electrical ApplianceLtd?

In order to justify its P/S ratio, Huarui Electrical ApplianceLtd would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a decent 8.9% gain to the company's revenues. Still, lamentably revenue has fallen 28% in aggregate from three years ago, which is disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

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

In light of this, it's somewhat alarming that Huarui Electrical ApplianceLtd's P/S sits in line with the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

The Final Word

Following Huarui Electrical ApplianceLtd's share price tumble, its P/S is just clinging on to the industry median P/S. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

The fact that Huarui Electrical ApplianceLtd currently trades at a P/S on par with the rest of the industry is surprising to us since its recent revenues have been in decline over the medium-term, all while the industry is set to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

Having said that, be aware Huarui Electrical ApplianceLtd is showing 1 warning sign in our investment analysis, you should know about.

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.