Risks Still Elevated At These Prices As Qinghai Huading Industrial Co., Ltd. (SHSE:600243) Shares Dive 31%

Qinghai Huading Industrial Co., Ltd. (SHSE:600243) shareholders that were waiting for something to happen have been dealt a blow with a 31% share price drop in the last month. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 19% in that time.

Even after such a large drop in price, you could still be forgiven for thinking Qinghai Huading Industrial is a stock not worth researching with a price-to-sales ratios (or "P/S") of 4x, considering almost half the companies in China's Machinery industry have P/S ratios below 2.5x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Qinghai Huading Industrial

How Qinghai Huading Industrial Has Been Performing

For example, consider that Qinghai Huading Industrial's financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Qinghai Huading Industrial will help you shine a light on its historical performance.

What Are Revenue Growth Metrics Telling Us About The High P/S?

The only time you'd be truly comfortable seeing a P/S as high as Qinghai Huading Industrial's is when the company's growth is on track to outshine the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 33%. As a result, revenue from three years ago have also fallen 44% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 24% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Qinghai Huading Industrial's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Key Takeaway

There's still some elevation in Qinghai Huading Industrial's P/S, even if the same can't be said for its share price recently. 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.

We've established that Qinghai Huading Industrial currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Qinghai Huading Industrial you should know about.

If these risks are making you reconsider your opinion on Qinghai Huading Industrial, 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.