Benign Growth For Hubei Xingfa Chemicals Group Co., Ltd. (SHSE:600141) Underpins Its Share Price

You may think that with a price-to-sales (or "P/S") ratio of 0.8x Hubei Xingfa Chemicals Group Co., Ltd. (SHSE:600141) is a stock worth checking out, seeing as almost half of all the Chemicals companies in China have P/S ratios greater than 2.2x and even P/S higher than 5x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

Check out our latest analysis for Hubei Xingfa Chemicals Group

How Has Hubei Xingfa Chemicals Group Performed Recently?

While the industry has experienced revenue growth lately, Hubei Xingfa Chemicals Group's revenue has gone into reverse gear, which is not great. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.

Keen to find out how analysts think Hubei Xingfa Chemicals Group's future stacks up against the industry? In that case, our free report is a great place to start.

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

There's an inherent assumption that a company should underperform the industry for P/S ratios like Hubei Xingfa Chemicals Group's to be considered reasonable.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 7.3%. Even so, admirably revenue has lifted 53% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Shifting to the future, estimates from the eight analysts covering the company suggest revenue should grow by 3.9% each year over the next three years. Meanwhile, the rest of the industry is forecast to expand by 14% each year, which is noticeably more attractive.

With this information, we can see why Hubei Xingfa Chemicals Group is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From Hubei Xingfa Chemicals Group's P/S?

While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

As we suspected, our examination of Hubei Xingfa Chemicals Group's analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

You need to take note of risks, for example - Hubei Xingfa Chemicals Group has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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.