Some Xinjiang Zhundong Petroleum Technology Co., Ltd. (SZSE:002207) Shareholders Look For Exit As Shares Take 30% Pounding

Xinjiang Zhundong Petroleum Technology Co., Ltd. (SZSE:002207) shares have had a horrible month, losing 30% after a relatively good period beforehand. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 39% in that time.

In spite of the heavy fall in price, you could still be forgiven for thinking Xinjiang Zhundong Petroleum Technology is a stock not worth researching with a price-to-sales ratios (or "P/S") of 3.7x, considering almost half the companies in China's Energy Services industry have P/S ratios below 2x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Xinjiang Zhundong Petroleum Technology

How Xinjiang Zhundong Petroleum Technology Has Been Performing

With revenue growth that's exceedingly strong of late, Xinjiang Zhundong Petroleum Technology has been doing very well. Perhaps the market is expecting future revenue performance to outperform the wider market, which has seemingly got people interested in the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

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

In order to justify its P/S ratio, Xinjiang Zhundong Petroleum Technology would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered an exceptional 41% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 41% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 17% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in mind, we find it worrying that Xinjiang Zhundong Petroleum Technology's P/S exceeds that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What Does Xinjiang Zhundong Petroleum Technology's P/S Mean For Investors?

Despite the recent share price weakness, Xinjiang Zhundong Petroleum Technology's P/S remains higher than most other companies in the industry. 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.

The fact that Xinjiang Zhundong Petroleum Technology currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Xinjiang Zhundong Petroleum Technology, and understanding them should be part of your investment process.

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.