Revenues Not Telling The Story For Hainan Yedao (Group) Co.,Ltd (SHSE:600238) After Shares Rise 26%

Those holding Hainan Yedao (Group) Co.,Ltd (SHSE:600238) shares would be relieved that the share price has rebounded 26% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 22% in the last twelve months.

Since its price has surged higher, you could be forgiven for thinking Hainan Yedao (Group)Ltd is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 13.8x, considering almost half the companies in China's Beverage industry have P/S ratios below 4.5x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Hainan Yedao (Group)Ltd

What Does Hainan Yedao (Group)Ltd's P/S Mean For Shareholders?

For example, consider that Hainan Yedao (Group)Ltd's financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. However, if this isn't the case, investors might get caught out paying too much for the stock.

Although there are no analyst estimates available for Hainan Yedao (Group)Ltd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Hainan Yedao (Group)Ltd's Revenue Growth Trending?

In order to justify its P/S ratio, Hainan Yedao (Group)Ltd would need to produce outstanding growth that's well in excess of the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 5.1%. The last three years don't look nice either as the company has shrunk revenue by 78% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 12% 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 Hainan Yedao (Group)Ltd's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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.

What Does Hainan Yedao (Group)Ltd's P/S Mean For Investors?

Shares in Hainan Yedao (Group)Ltd have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

Our examination of Hainan Yedao (Group)Ltd 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.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Hainan Yedao (Group)Ltd (2 shouldn't be ignored!) that you need to be mindful of.

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).

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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.