Guizhou Zhenhua E-chem Inc. (SHSE:688707) shares have had a horrible month, losing 26% after a relatively good period beforehand. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 47% share price drop.

After such a large drop in price, when close to half the companies operating in China's Electrical industry have price-to-sales ratios (or "P/S") above 2.2x, you may consider Guizhou Zhenhua E-chem as an enticing stock to check out with its 1.7x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

What Does Guizhou Zhenhua E-chem's P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, Guizhou Zhenhua E-chem's revenue has gone into reverse gear, which is not great. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. If you still 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.

Is There Any Revenue Growth Forecasted For Guizhou Zhenhua E-chem?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Guizhou Zhenhua E-chem's to be considered reasonable.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 67%. The last three years don't look nice either as the company has shrunk revenue by 22% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Shifting to the future, estimates from the two analysts covering the company suggest revenue should grow by 42% over the next year. That's shaping up to be materially higher than the 25% growth forecast for the broader industry.

In light of this, it's peculiar that Guizhou Zhenhua E-chem's P/S sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Key Takeaway

Guizhou Zhenhua E-chem's P/S has taken a dip along with its share price. 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.

A look at Guizhou Zhenhua E-chem's revenues reveals that, despite glowing future growth forecasts, its P/S is much lower than we'd expect. When we see strong growth forecasts like this, we can only assume potential risks are what might be placing significant pressure on the P/S ratio. At least price risks look to be very low, but investors seem to think future revenues could see a lot of volatility.

It is also worth noting that we have found 2 warning signs for Guizhou Zhenhua E-chem (1 makes us a bit uncomfortable!) that you need to take into consideration.

If these risks are making you reconsider your opinion on Guizhou Zhenhua E-chem, 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.