Hunan New Wellful Co.,Ltd. (SHSE:600975) Might Not Be As Mispriced As It Looks After Plunging 25%

Hunan New Wellful Co.,Ltd. (SHSE:600975) shareholders won't be pleased to see that the share price has had a very rough month, dropping 25% and undoing the prior period's positive performance. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 19% share price drop.

Although its price has dipped substantially, you could still be forgiven for feeling indifferent about Hunan New WellfulLtd's P/S ratio of 1.6x, since the median price-to-sales (or "P/S") ratio for the Food industry in China is also close to 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 Hunan New WellfulLtd

How Has Hunan New WellfulLtd Performed Recently?

Recent revenue growth for Hunan New WellfulLtd has been in line with the industry. Perhaps the market is expecting future revenue performance to show no drastic signs of changing, justifying the P/S being at current levels. If you like the company, you'd be hoping this can at least be maintained so that you could pick up some stock while it's not quite in favour.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Hunan New WellfulLtd.

How Is Hunan New WellfulLtd's Revenue Growth Trending?

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

Retrospectively, the last year delivered virtually the same number to the company's top line as the year before. However, a few strong years before that means that it was still able to grow revenue by an impressive 112% in total over the last three years. So while the company has done a solid job in the past, it's somewhat concerning to see revenue growth decline as much as it has.

Shifting to the future, estimates from the five analysts covering the company suggest revenue should grow by 64% over the next year. Meanwhile, the rest of the industry is forecast to only expand by 17%, which is noticeably less attractive.

With this information, we find it interesting that Hunan New WellfulLtd is trading at a fairly similar P/S compared to the industry. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Final Word

With its share price dropping off a cliff, the P/S for Hunan New WellfulLtd looks to be in line with the rest of the Food industry. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Looking at Hunan New WellfulLtd's analyst forecasts revealed that its superior revenue outlook isn't giving the boost to its P/S that we would've expected. When we see a strong revenue outlook, with growth outpacing the industry, we can only assume potential uncertainty around these figures are what might be placing slight pressure on the P/S ratio. This uncertainty seems to be reflected in the share price which, while stable, could be higher given the revenue forecasts.

Before you settle on your opinion, we've discovered 1 warning sign for Hunan New WellfulLtd that you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com