Shenzhen Hongtao Group Co.,Ltd. (SZSE:002325) Shares May Have Slumped 26% But Getting In Cheap Is Still Unlikely

Shenzhen Hongtao Group Co.,Ltd. (SZSE:002325) shares have had a horrible month, losing 26% after a relatively good period beforehand. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 23% in that time.

Even after such a large drop in price, when almost half of the companies in China's Construction industry have price-to-sales ratios (or "P/S") below 1.1x, you may still consider Shenzhen Hongtao GroupLtd as a stock not worth researching with its 3.9x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Shenzhen Hongtao GroupLtd

How Shenzhen Hongtao GroupLtd Has Been Performing

For instance, Shenzhen Hongtao GroupLtd's receding revenue in recent times would have to be some food for thought. 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. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Shenzhen Hongtao GroupLtd will help you shine a light on its historical performance.

How Is Shenzhen Hongtao GroupLtd's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Shenzhen Hongtao GroupLtd's is when the company's growth is on track to outshine the industry decidedly.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 64%. This means it has also seen a slide in revenue over the longer-term as revenue is down 83% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 15% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we find it worrying that Shenzhen Hongtao GroupLtd's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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 Shenzhen Hongtao GroupLtd's P/S Mean For Investors?

Even after such a strong price drop, Shenzhen Hongtao GroupLtd's P/S still exceeds the industry median significantly. 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 Shenzhen Hongtao GroupLtd 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. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

There are also other vital risk factors to consider before investing and we've discovered 3 warning signs for Shenzhen Hongtao GroupLtd that you should be aware of.

If these risks are making you reconsider your opinion on Shenzhen Hongtao GroupLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.