The Market Doesn't Like What It Sees From Guizhou Chitianhua Co.,Ltd.'s (SHSE:600227) Revenues Yet As Shares Tumble 34%

The Guizhou Chitianhua Co.,Ltd. (SHSE:600227) share price has softened a substantial 34% over the previous 30 days, handing back much of the gains the stock has made lately. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 14% share price drop.

Although its price has dipped substantially, considering around half the companies operating in China's Chemicals industry have price-to-sales ratios (or "P/S") above 2.2x, you may still consider Guizhou ChitianhuaLtd as an solid investment opportunity with its 1.6x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

See our latest analysis for Guizhou ChitianhuaLtd

What Does Guizhou ChitianhuaLtd's Recent Performance Look Like?

For example, consider that Guizhou ChitianhuaLtd's financial performance has been pretty ordinary lately as revenue growth is non-existent. Perhaps the market believes the recent lacklustre revenue performance is a sign of future underperformance relative to industry peers, hurting the P/S. If not, then existing shareholders may be feeling optimistic about the future direction of the share price.

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 Guizhou ChitianhuaLtd's earnings, revenue and cash flow.

Do Revenue Forecasts Match The Low P/S Ratio?

Guizhou ChitianhuaLtd's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. Whilst it's an improvement, it wasn't enough to get the company out of the hole it was in, with revenue down 4.0% overall from three years ago. 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 25% shows it's an unpleasant look.

In light of this, it's understandable that Guizhou ChitianhuaLtd's P/S would sit below the majority of other companies. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

The Bottom Line On Guizhou ChitianhuaLtd's P/S

Guizhou ChitianhuaLtd's recently weak share price has pulled its P/S back below other Chemicals companies. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

It's no surprise that Guizhou ChitianhuaLtd maintains its low P/S off the back of its sliding revenue over the medium-term. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Guizhou ChitianhuaLtd you should know about.

If you're unsure about the strength of Guizhou ChitianhuaLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.