Guizhou Zhongyida Co., Ltd (SHSE:600610) Shares May Have Slumped 31% But Getting In Cheap Is Still Unlikely

Guizhou Zhongyida Co., Ltd (SHSE:600610) shareholders that were waiting for something to happen have been dealt a blow with a 31% share price drop in the last month. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 69% loss during that time.

In spite of the heavy fall in price, when almost half of the companies in China's Chemicals industry have price-to-sales ratios (or "P/S") below 2x, you may still consider Guizhou Zhongyida as a stock probably not worth researching with its 3.7x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

See our latest analysis for Guizhou Zhongyida

What Does Guizhou Zhongyida's Recent Performance Look Like?

For instance, Guizhou Zhongyida's receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Is There Enough Revenue Growth Forecasted For Guizhou Zhongyida?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Guizhou Zhongyida's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 14% decrease to the company's top line. Unfortunately, that's brought it right back to where it started three years ago with revenue growth being virtually non-existent overall during that time. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Comparing that to the industry, which is predicted to deliver 23% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this information, we find it concerning that Guizhou Zhongyida is trading at a P/S higher than 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. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Bottom Line On Guizhou Zhongyida's P/S

Despite the recent share price weakness, Guizhou Zhongyida's P/S remains higher than most other companies in 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 examination of Guizhou Zhongyida revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You should always think about risks. Case in point, we've spotted 1 warning sign for Guizhou Zhongyida you should be aware of.

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).

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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.