Hainan Development HoldingsNanhai Co., Ltd. (SZSE:002163) Shares May Have Slumped 28% But Getting In Cheap Is Still Unlikely

Hainan Development HoldingsNanhai Co., Ltd. (SZSE:002163) shareholders won't be pleased to see that the share price has had a very rough month, dropping 28% and undoing the prior period's positive performance. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 11% in that time.

Although its price has dipped substantially, you could still be forgiven for feeling indifferent about Hainan Development HoldingsNanhai's P/S ratio of 1.5x, since the median price-to-sales (or "P/S") ratio for the Construction industry in China is also close to 1.4x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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See our latest analysis for Hainan Development HoldingsNanhai

What Does Hainan Development HoldingsNanhai's P/S Mean For Shareholders?

We'd have to say that with no tangible growth over the last year, Hainan Development HoldingsNanhai's revenue has been unimpressive. It might be that many expect the uninspiring revenue performance to only match most other companies at best over the coming period, which has kept the P/S from rising. Those who are bullish on Hainan Development HoldingsNanhai will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

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 Hainan Development HoldingsNanhai's earnings, revenue and cash flow.

How Is Hainan Development HoldingsNanhai's Revenue Growth Trending?

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

Retrospectively, the last year delivered virtually the same number to the company's top line as the year before. That's essentially a continuation of what we've seen over the last three years, as its revenue growth has been virtually non-existent for that entire period. So it seems apparent to us that the company has struggled to grow revenue meaningfully over that time.

In contrast to the company, the rest of the industry is expected to grow by 11% 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 Hainan Development HoldingsNanhai'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 Does Hainan Development HoldingsNanhai's P/S Mean For Investors?

With its share price dropping off a cliff, the P/S for Hainan Development HoldingsNanhai looks to be in line with the rest of the Construction 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.

We find it unexpected that Hainan Development HoldingsNanhai trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected 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. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Hainan Development HoldingsNanhai that you need to be mindful of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.