Shandong Chiway Industry Development Co.,Ltd (SZSE:002374) May Have Run Too Fast Too Soon With Recent 26% Price Plummet

Shandong Chiway Industry Development Co.,Ltd (SZSE:002374) shares have retraced a considerable 26% in the last month, reversing a fair amount of their solid recent performance. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 30% in that time.

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 Shandong Chiway Industry DevelopmentLtd as a stock probably not worth researching with its 4x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

See our latest analysis for Shandong Chiway Industry DevelopmentLtd

How Shandong Chiway Industry DevelopmentLtd Has Been Performing

For instance, Shandong Chiway Industry DevelopmentLtd's receding revenue in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. 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 Shandong Chiway Industry DevelopmentLtd will help you shine a light on its historical performance.

How Is Shandong Chiway Industry DevelopmentLtd's Revenue Growth Trending?

In order to justify its P/S ratio, Shandong Chiway Industry DevelopmentLtd would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered a frustrating 1.2% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 2.8% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 34% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's alarming that Shandong Chiway Industry DevelopmentLtd's P/S sits above the majority of other companies. 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 We Can Learn From Shandong Chiway Industry DevelopmentLtd's P/S?

There's still some elevation in Shandong Chiway Industry DevelopmentLtd's P/S, even if the same can't be said for its share price recently. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our examination of Shandong Chiway Industry 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. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Before you settle on your opinion, we've discovered 1 warning sign for Shandong Chiway Industry DevelopmentLtd that you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.