Take Care Before Jumping Onto Aofu Environmental Technology Co.,Ltd. (SHSE:688021) Even Though It's 26% Cheaper

To the annoyance of some shareholders, Aofu Environmental Technology Co.,Ltd. (SHSE:688021) shares are down a considerable 26% in the last month, which continues a horrid run for the company. For any long-term shareholders, the last month ends a year to forget by locking in a 57% share price decline.

In spite of the heavy fall in price, there still wouldn't be many who think Aofu Environmental TechnologyLtd's price-to-sales (or "P/S") ratio of 2.4x is worth a mention when the median P/S in China's Machinery industry is similar at about 2.6x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for Aofu Environmental TechnologyLtd

How Aofu Environmental TechnologyLtd Has Been Performing

Aofu Environmental TechnologyLtd certainly has been doing a good job lately as it's been growing revenue more than most other companies. Perhaps the market is expecting this level of performance to taper off, keeping the P/S from soaring. 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 not quite in favour.

Want the full picture on analyst estimates for the company? Then our free report on Aofu Environmental TechnologyLtd will help you uncover what's on the horizon.

How Is Aofu Environmental TechnologyLtd's Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like Aofu Environmental TechnologyLtd's is when the company's growth is tracking the industry closely.

Taking a look back first, we see that the company grew revenue by an impressive 63% last year. Revenue has also lifted 5.8% in aggregate from three years ago, mostly 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.

Turning to the outlook, the next year should generate growth of 109% as estimated by the four analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 24%, which is noticeably less attractive.

With this in consideration, we find it intriguing that Aofu Environmental TechnologyLtd's P/S is closely matching its industry peers. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Final Word

With its share price dropping off a cliff, the P/S for Aofu Environmental TechnologyLtd looks to be in line with the rest of the Machinery industry. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Despite enticing revenue growth figures that outpace the industry, Aofu Environmental TechnologyLtd's P/S isn't quite what we'd expect. When we see a strong revenue outlook, with growth outpacing the industry, we can only assume potential uncertainty around these figures are what might be placing slight pressure on the P/S ratio. This uncertainty seems to be reflected in the share price which, while stable, could be higher given the revenue forecasts.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Aofu Environmental TechnologyLtd, and understanding should be part of your investment process.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.