Xinglong Holding (Group) Company Ltd. (SZSE:000955) Shares May Have Slumped 26% But Getting In Cheap Is Still Unlikely

Xinglong Holding (Group) Company Ltd. (SZSE:000955) shareholders won't be pleased to see that the share price has had a very rough month, dropping 26% and undoing the prior period's positive performance. To make matters worse, the recent drop has wiped out a year's worth of gains with the share price now back where it started a year ago.

In spite of the heavy fall in price, you could still be forgiven for thinking Xinglong Holding (Group) is a stock not worth researching with a price-to-sales ratios (or "P/S") of 3.2x, considering almost half the companies in China's Luxury industry have P/S ratios below 1.6x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Xinglong Holding (Group)

How Has Xinglong Holding (Group) Performed Recently?

For example, consider that Xinglong Holding (Group)'s financial performance has been poor lately as its revenue has been in decline. 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 Xinglong Holding (Group), take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Xinglong Holding (Group)'s Revenue Growth Trending?

Xinglong Holding (Group)'s P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 13%. As a result, revenue from three years ago have also fallen 43% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 18% shows it's an unpleasant look.

With this in mind, we find it worrying that Xinglong Holding (Group)'s P/S exceeds that of its industry peers. 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 Xinglong Holding (Group)'s P/S

Despite the recent share price weakness, Xinglong Holding (Group)'s P/S remains higher than most other companies in the industry. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of Xinglong Holding (Group) 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. 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.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Xinglong Holding (Group) you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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.