Lanzhou Huanghe Enterprise Co., Ltd's (SZSE:000929) Popularity With Investors Under Threat As Stock Sinks 27%

To the annoyance of some shareholders, Lanzhou Huanghe Enterprise Co., Ltd (SZSE:000929) shares are down a considerable 27% in the last month, which continues a horrid run for the company. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 37% share price drop.

Although its price has dipped substantially, it's still not a stretch to say that Lanzhou Huanghe Enterprise's price-to-sales (or "P/S") ratio of 4.6x right now seems quite "middle-of-the-road" compared to the Beverage industry in China, where the median P/S ratio is around 5.1x. 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 Lanzhou Huanghe Enterprise

How Has Lanzhou Huanghe Enterprise Performed Recently?

For instance, Lanzhou Huanghe Enterprise's receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is moderate because investors think the company might still do enough to be in line with the broader industry in the near future. 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.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Lanzhou Huanghe Enterprise's earnings, revenue and cash flow.

Is There Some Revenue Growth Forecasted For Lanzhou Huanghe Enterprise?

The only time you'd be comfortable seeing a P/S like Lanzhou Huanghe Enterprise's is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered a frustrating 5.4% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 28% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 17% shows it's an unpleasant look.

In light of this, it's somewhat alarming that Lanzhou Huanghe Enterprise's P/S sits in line with the majority of other companies. 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. 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.

What We Can Learn From Lanzhou Huanghe Enterprise's P/S?

Following Lanzhou Huanghe Enterprise's share price tumble, its P/S is just clinging on to the industry median P/S. 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.

The fact that Lanzhou Huanghe Enterprise 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. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Plus, you should also learn about these 2 warning signs we've spotted with Lanzhou Huanghe Enterprise.

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.