Henan Dayou Energy Co., Ltd's (SHSE:600403) Share Price Not Quite Adding Up

It's not a stretch to say that Henan Dayou Energy Co., Ltd's (SHSE:600403) price-to-sales (or "P/S") ratio of 1.3x right now seems quite "middle-of-the-road" for companies in the Oil and Gas industry in China, where the median P/S ratio is around 1.4x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for Henan Dayou Energy

What Does Henan Dayou Energy's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Henan Dayou Energy over the last year, which is not ideal at all. One possibility is that the P/S is moderate because investors think the company might still do enough to be in line with the broader industry in the near future. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

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

How Is Henan Dayou Energy's Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Henan Dayou Energy's 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 37%. This means it has also seen a slide in revenue over the longer-term as revenue is down 25% 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 6.3% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Henan Dayou Energy's P/S exceeds that of its industry peers. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

What We Can Learn From Henan Dayou Energy's P/S?

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

The fact that Henan Dayou Energy currently trades at a P/S on par with the rest of the industry is surprising to us since its recent revenues have been in decline over the medium-term, all while the industry is set to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Henan Dayou Energy with six simple checks on some of these key factors.

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.