Chahua Modern Housewares Co., Ltd.'s (SHSE:603615) 26% Share Price Plunge Could Signal Some Risk

Chahua Modern Housewares Co., Ltd. (SHSE:603615) shares have retraced a considerable 26% in the last month, reversing a fair amount of their solid recent performance. Looking at the bigger picture, even after this poor month the stock is up 92% in the last year.

Although its price has dipped substantially, when almost half of the companies in China's Consumer Durables industry have price-to-sales ratios (or "P/S") below 2x, you may still consider Chahua Modern Housewares as a stock not worth researching with its 5.9x 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 Chahua Modern Housewares

What Does Chahua Modern Housewares' P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Chahua Modern Housewares over the last year, which is not ideal at all. 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. If not, then existing shareholders may be quite nervous about the viability of the share price.

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

How Is Chahua Modern Housewares' Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Chahua Modern Housewares' to be considered reasonable.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 6.8%. As a result, revenue from three years ago have also fallen 20% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 11% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's alarming that Chahua Modern Housewares' P/S sits above the majority of other companies. 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. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

A significant share price dive has done very little to deflate Chahua Modern Housewares' very lofty P/S. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Chahua Modern Housewares currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. 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. 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.

We don't want to rain on the parade too much, but we did also find 4 warning signs for Chahua Modern Housewares (2 are concerning!) that you need to be mindful of.

If you're unsure about the strength of Chahua Modern Housewares' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.