Hunan Zhenghong Science and Technology Develop Co.,Ltd.'s (SZSE:000702) 25% Dip Still Leaving Some Shareholders Feeling Restless Over Its P/SRatio

Hunan Zhenghong Science and Technology Develop Co.,Ltd. (SZSE:000702) shares have retraced a considerable 25% in the last month, reversing a fair amount of their solid recent performance. Longer-term shareholders will rue the drop in the share price, since it's now virtually flat for the year after a promising few quarters.

Although its price has dipped substantially, you could still be forgiven for feeling indifferent about Hunan Zhenghong Science and Technology DevelopLtd's P/S ratio of 2x, since the median price-to-sales (or "P/S") ratio for the Food industry in China is also close to 1.8x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for Hunan Zhenghong Science and Technology DevelopLtd

How Has Hunan Zhenghong Science and Technology DevelopLtd Performed Recently?

For example, consider that Hunan Zhenghong Science and Technology DevelopLtd's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Hunan Zhenghong Science and Technology DevelopLtd will help you shine a light on its historical performance.

Is There Some Revenue Growth Forecasted For Hunan Zhenghong Science and Technology DevelopLtd?

In order to justify its P/S ratio, Hunan Zhenghong Science and Technology DevelopLtd would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a frustrating 13% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 22% 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 15% 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 Hunan Zhenghong Science and Technology DevelopLtd'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.

The Bottom Line On Hunan Zhenghong Science and Technology DevelopLtd's P/S

With its share price dropping off a cliff, the P/S for Hunan Zhenghong Science and Technology DevelopLtd looks to be in line with the rest of the Food industry. 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 Hunan Zhenghong Science and Technology DevelopLtd 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. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

You need to take note of risks, for example - Hunan Zhenghong Science and Technology DevelopLtd has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

If these risks are making you reconsider your opinion on Hunan Zhenghong Science and Technology DevelopLtd, 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.