Subdued Growth No Barrier To Hunan Zhenghong Science and Technology Develop Co.,Ltd. (SZSE:000702) With Shares Advancing 30%

Hunan Zhenghong Science and Technology Develop Co.,Ltd. (SZSE:000702) shares have continued their recent momentum with a 30% gain in the last month alone. Notwithstanding the latest gain, the annual share price return of 4.9% isn't as impressive.

In spite of the firm bounce in price, there still wouldn't be many who think Hunan Zhenghong Science and Technology DevelopLtd's price-to-sales (or "P/S") ratio of 1.7x is worth a mention when the median P/S in China's Food industry is similar at about 1.6x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

See our latest analysis for Hunan Zhenghong Science and Technology DevelopLtd

How Hunan Zhenghong Science and Technology DevelopLtd Has Been Performing

As an illustration, revenue has deteriorated at Hunan Zhenghong Science and Technology DevelopLtd over the last year, which is not ideal at all. 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 you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

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.

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

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.

Retrospectively, the last year delivered a frustrating 11% decrease to the company's top line. As a result, revenue from three years ago have also fallen 12% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 18% shows it's an unpleasant look.

With this information, we find it concerning 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 recent poor growth rate 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 the recent negative growth rates.

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

Hunan Zhenghong Science and Technology DevelopLtd's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of 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.

Our look at Hunan Zhenghong Science and Technology DevelopLtd revealed its shrinking revenues over the medium-term haven't impacted the P/S as much as we anticipated, given 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 recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Having said that, be aware Hunan Zhenghong Science and Technology DevelopLtd is showing 3 warning signs in our investment analysis, and 2 of those make us uncomfortable.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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

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.