Shanghai Taihe Water Technology Development Co.,Ltd.'s (SHSE:605081) 26% Dip Still Leaving Some Shareholders Feeling Restless Over Its P/SRatio

The Shanghai Taihe Water Technology Development Co.,Ltd. (SHSE:605081) share price has fared very poorly over the last month, falling by a substantial 26%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 28% share price drop.

Even after such a large drop in price, when almost half of the companies in China's Commercial Services industry have price-to-sales ratios (or "P/S") below 2.9x, you may still consider Shanghai Taihe Water Technology DevelopmentLtd as a stock not worth researching with its 7.4x 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.

Check out our latest analysis for Shanghai Taihe Water Technology DevelopmentLtd

What Does Shanghai Taihe Water Technology DevelopmentLtd's Recent Performance Look Like?

For instance, Shanghai Taihe Water Technology DevelopmentLtd's receding revenue in recent times would have to be some food for thought. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Shanghai Taihe Water Technology DevelopmentLtd will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For Shanghai Taihe Water Technology DevelopmentLtd?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Shanghai Taihe Water Technology DevelopmentLtd's to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 2.1%. As a result, revenue from three years ago have also fallen 65% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 34% shows it's an unpleasant look.

With this information, we find it concerning that Shanghai Taihe Water Technology DevelopmentLtd 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.

The Bottom Line On Shanghai Taihe Water Technology DevelopmentLtd's P/S

Shanghai Taihe Water Technology DevelopmentLtd's shares may have suffered, but its P/S remains high. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Shanghai Taihe Water Technology DevelopmentLtd 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. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Shanghai Taihe Water Technology DevelopmentLtd that 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.