Hunan Mendale Hometextile Co.,Ltd's (SZSE:002397) 29% Dip In Price Shows Sentiment Is Matching Revenues

The Hunan Mendale Hometextile Co.,Ltd (SZSE:002397) share price has fared very poorly over the last month, falling by a substantial 29%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 41% share price drop.

Even after such a large drop in price, considering around half the companies operating in China's Luxury industry have price-to-sales ratios (or "P/S") above 1.5x, you may still consider Hunan Mendale HometextileLtd as an solid investment opportunity with its 0.7x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

View our latest analysis for Hunan Mendale HometextileLtd

How Has Hunan Mendale HometextileLtd Performed Recently?

Hunan Mendale HometextileLtd has been doing a decent job lately as it's been growing revenue at a reasonable pace. One possibility is that the P/S ratio is low because investors think this good revenue growth might actually underperform the broader industry in the near future. 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.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Hunan Mendale HometextileLtd's earnings, revenue and cash flow.

How Is Hunan Mendale HometextileLtd's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as low as Hunan Mendale HometextileLtd's is when the company's growth is on track to lag the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 6.1% last year. Still, lamentably revenue has fallen 11% in aggregate from three years ago, which is disappointing. 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 17% shows it's an unpleasant look.

With this in mind, we understand why Hunan Mendale HometextileLtd's P/S is lower than most of its industry peers. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

What We Can Learn From Hunan Mendale HometextileLtd's P/S?

The southerly movements of Hunan Mendale HometextileLtd's shares means its P/S is now sitting at a pretty low level. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Hunan Mendale HometextileLtd revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. 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 moving strongly in either direction in the near future under these circumstances.

It is also worth noting that we have found 2 warning signs for Hunan Mendale HometextileLtd (1 makes us a bit uncomfortable!) that you need to take into consideration.

If you're unsure about the strength of Hunan Mendale HometextileLtd's 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.