Risks Still Elevated At These Prices As Hunan Zhenghong Science and Technology Develop Co.,Ltd. (SZSE:000702) Shares Dive 27%

Hunan Zhenghong Science and Technology Develop Co.,Ltd. (SZSE:000702) shareholders that were waiting for something to happen have been dealt a blow with a 27% share price drop in the last month. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 30% in that time.

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 1.2x, since the median price-to-sales (or "P/S") ratio for the Food industry in China is also close to 1.7x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

View our latest analysis for Hunan Zhenghong Science and Technology DevelopLtd

What Does Hunan Zhenghong Science and Technology DevelopLtd's P/S Mean For Shareholders?

We'd have to say that with no tangible growth over the last year, Hunan Zhenghong Science and Technology DevelopLtd's revenue has been unimpressive. One possibility is that the P/S is moderate because investors think this benign revenue growth rate might not be enough to outperform the broader industry in the near future. If not, then existing shareholders may be feeling hopeful about the future direction of the share price.

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

Do Revenue Forecasts Match The P/S Ratio?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Hunan Zhenghong Science and Technology DevelopLtd's to be considered reasonable.

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. Although pleasingly revenue has lifted 44% in aggregate from three years ago, notwithstanding the last 12 months. 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.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 16% shows it's noticeably less attractive.

With this information, we find it interesting that Hunan Zhenghong Science and Technology DevelopLtd is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

The Final Word

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.

We've established that Hunan Zhenghong Science and Technology DevelopLtd's average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. Right now we are uncomfortable with the P/S as this revenue performance isn't likely to support a more positive sentiment for long. Unless the recent medium-term conditions improve, it's hard to accept the current share price as fair value.

You should always think about risks. Case in point, we've spotted 2 warning signs for Hunan Zhenghong Science and Technology DevelopLtd you should be aware of, and 1 of them is a bit concerning.

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.