Zhejiang Haiyan Power System Resources Environmental Technology Co.,Ltd.'s (SHSE:688565) Popularity With Investors Under Threat As Stock Sinks 26%

To the annoyance of some shareholders, Zhejiang Haiyan Power System Resources Environmental Technology Co.,Ltd. (SHSE:688565) shares are down a considerable 26% in the last month, which continues a horrid run for the company. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 39% in that time.

Even after such a large drop in price, when almost half of the companies in China's Machinery industry have price-to-sales ratios (or "P/S") below 2.6x, you may still consider Zhejiang Haiyan Power System Resources Environmental TechnologyLtd as a stock probably not worth researching with its 4.2x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

View our latest analysis for Zhejiang Haiyan Power System Resources Environmental TechnologyLtd

How Zhejiang Haiyan Power System Resources Environmental TechnologyLtd Has Been Performing

As an illustration, revenue has deteriorated at Zhejiang Haiyan Power System Resources Environmental TechnologyLtd over the last year, which is not ideal at all. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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 Zhejiang Haiyan Power System Resources Environmental TechnologyLtd's earnings, revenue and cash flow.

How Is Zhejiang Haiyan Power System Resources Environmental TechnologyLtd's Revenue Growth Trending?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Zhejiang Haiyan Power System Resources Environmental TechnologyLtd'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 47%. As a result, revenue from three years ago have also fallen 18% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 28% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that Zhejiang Haiyan Power System Resources Environmental TechnologyLtd is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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.

What Does Zhejiang Haiyan Power System Resources Environmental TechnologyLtd's P/S Mean For Investors?

There's still some elevation in Zhejiang Haiyan Power System Resources Environmental TechnologyLtd's P/S, even if the same can't be said for its share price recently. 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.

Our examination of Zhejiang Haiyan Power System Resources Environmental TechnologyLtd revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. 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. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Zhejiang Haiyan Power System Resources Environmental TechnologyLtd (at least 1 which is a bit unpleasant), and understanding them should be part of your investment process.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.