Benign Growth For Zhejiang RIFA Precision Machinery Co., Ltd. (SZSE:002520) Underpins Stock's 27% Plummet

Zhejiang RIFA Precision Machinery Co., Ltd. (SZSE:002520) shareholders that were waiting for something to happen have been dealt a blow with a 27% share price drop in the last month. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 33% share price drop.

Since its price has dipped substantially, Zhejiang RIFA Precision Machinery may be sending buy signals at present with its price-to-sales (or "P/S") ratio of 1.4x, considering almost half of all companies in the Machinery industry in China have P/S ratios greater than 2.6x and even P/S higher than 5x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

See our latest analysis for Zhejiang RIFA Precision Machinery

How Zhejiang RIFA Precision Machinery Has Been Performing

The revenue growth achieved at Zhejiang RIFA Precision Machinery over the last year would be more than acceptable for most companies. It might be that many expect the respectable revenue performance to degrade substantially, which has repressed the P/S. 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 out of favour.

Although there are no analyst estimates available for Zhejiang RIFA Precision Machinery, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Zhejiang RIFA Precision Machinery's Revenue Growth Trending?

In order to justify its P/S ratio, Zhejiang RIFA Precision Machinery would need to produce sluggish growth that's trailing the industry.

Retrospectively, the last year delivered a decent 9.6% gain to the company's revenues. The solid recent performance means it was also able to grow revenue by 13% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 24% shows it's noticeably less attractive.

With this information, we can see why Zhejiang RIFA Precision Machinery is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

What We Can Learn From Zhejiang RIFA Precision Machinery's P/S?

Zhejiang RIFA Precision Machinery's P/S has taken a dip along with its share price. 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.

In line with expectations, Zhejiang RIFA Precision Machinery maintains its low P/S on the weakness of its recent three-year growth being lower than the wider industry forecast. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Zhejiang RIFA Precision Machinery (1 can't be ignored) you should be aware 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.