Xi'an Typical Industries Co.,Ltd's (SHSE:600302) 26% Share Price Plunge Could Signal Some Risk

The Xi'an Typical Industries Co.,Ltd (SHSE:600302) share price has softened a substantial 26% over the previous 30 days, handing back much of the gains the stock has made lately. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 22% in that time.

Although its price has dipped substantially, there still wouldn't be many who think Xi'an Typical IndustriesLtd's price-to-sales (or "P/S") ratio of 3.4x is worth a mention when the median P/S in China's Machinery industry is similar at about 2.9x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Check out our latest analysis for Xi'an Typical IndustriesLtd

What Does Xi'an Typical IndustriesLtd's Recent Performance Look Like?

For example, consider that Xi'an Typical IndustriesLtd's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Xi'an Typical IndustriesLtd's earnings, revenue and cash flow.

How Is Xi'an Typical IndustriesLtd's Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Xi'an Typical IndustriesLtd's to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 8.7%. The last three years don't look nice either as the company has shrunk revenue by 78% in aggregate. 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 22% 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 Xi'an Typical IndustriesLtd's P/S exceeds that of its industry peers. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. There's a 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.

What We Can Learn From Xi'an Typical IndustriesLtd's P/S?

Xi'an Typical IndustriesLtd's plummeting stock price has brought its P/S back to a similar region as the rest of the industry. 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 Xi'an Typical IndustriesLtd 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. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Having said that, be aware Xi'an Typical IndustriesLtd is showing 1 warning sign in our investment analysis, you should know about.

If you're unsure about the strength of Xi'an Typical IndustriesLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.