Guizhou Zhenhua E-chem Inc.'s (SHSE:688707) Share Price Boosted 35% But Its Business Prospects Need A Lift Too

The Guizhou Zhenhua E-chem Inc. (SHSE:688707) share price has done very well over the last month, posting an excellent gain of 35%. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 50% over that time.

Although its price has surged higher, Guizhou Zhenhua E-chem may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 1.3x, since almost half of all companies in the Electrical industry in China have P/S ratios greater than 2.4x and even P/S higher than 5x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

View our latest analysis for Guizhou Zhenhua E-chem

What Does Guizhou Zhenhua E-chem's Recent Performance Look Like?

Guizhou Zhenhua E-chem could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. 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.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Guizhou Zhenhua E-chem.

Do Revenue Forecasts Match The Low P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as low as Guizhou Zhenhua E-chem's is when the company's growth is on track to lag the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 61%. Even so, admirably revenue has lifted 68% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Looking ahead now, revenue is anticipated to slump, contracting by 25% during the coming year according to the two analysts following the company. That's not great when the rest of the industry is expected to grow by 23%.

With this in consideration, we find it intriguing that Guizhou Zhenhua E-chem's P/S is closely matching its industry peers. However, shrinking revenues are unlikely to lead to a stable P/S over the longer term. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Bottom Line On Guizhou Zhenhua E-chem's P/S

Despite Guizhou Zhenhua E-chem's share price climbing recently, its P/S still lags most other companies. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

With revenue forecasts that are inferior to the rest of the industry, it's no surprise that Guizhou Zhenhua E-chem's P/S is on the lower end of the spectrum. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Guizhou Zhenhua E-chem (1 is a bit concerning!) that you need to be mindful of.

If you're unsure about the strength of Guizhou Zhenhua E-chem'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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