Investors Still Aren't Entirely Convinced By Guanghui Energy Co., Ltd.'s (SHSE:600256) Revenues Despite 29% Price Jump

Guanghui Energy Co., Ltd. (SHSE:600256) shares have had a really impressive month, gaining 29% after a shaky period beforehand. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 3.0% over the last year.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about Guanghui Energy's P/S ratio of 1.1x, since the median price-to-sales (or "P/S") ratio for the Oil and Gas industry in China is also close to 1.3x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Check out our latest analysis for Guanghui Energy

How Guanghui Energy Has Been Performing

Recent times haven't been great for Guanghui Energy as its revenue has been falling quicker than most other companies. It might be that many expect the dismal revenue performance to revert back to industry averages soon, which has kept the P/S from falling. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value. If not, then existing shareholders may be a little nervous about the viability of the share price.

Keen to find out how analysts think Guanghui Energy's future stacks up against the industry? In that case, our free report is a great place to start.

What Are Revenue Growth Metrics Telling Us About The P/S?

In order to justify its P/S ratio, Guanghui Energy would need to produce growth that's similar to the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 40%. Even so, admirably revenue has lifted 136% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Shifting to the future, estimates from the five analysts covering the company suggest revenue should grow by 33% over the next year. That's shaping up to be materially higher than the 5.7% growth forecast for the broader industry.

In light of this, it's curious that Guanghui Energy's P/S sits in line with the majority of other companies. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Key Takeaway

Its shares have lifted substantially and now Guanghui Energy's P/S is back within range of the industry median. 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.

Despite enticing revenue growth figures that outpace the industry, Guanghui Energy's P/S isn't quite what we'd expect. There could be some risks that the market is pricing in, which is preventing the P/S ratio from matching the positive outlook. It appears some are indeed anticipating revenue instability, because these conditions should normally provide a boost to the share price.

You need to take note of risks, for example - Guanghui Energy has 4 warning signs (and 1 which is concerning) we think you should know about.

If these risks are making you reconsider your opinion on Guanghui Energy, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.