Insufficient Growth At Hubei Yihua Chemical Industry Co., Ltd. (SZSE:000422) Hampers Share Price

With a price-to-sales (or "P/S") ratio of 0.5x Hubei Yihua Chemical Industry Co., Ltd. (SZSE:000422) may be sending bullish signals at the moment, given that almost half of all the Chemicals companies in China have P/S ratios greater than 2.2x and even P/S higher than 5x are not unusual. 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 Yihua Chemical Industry

How Has Hubei Yihua Chemical Industry Performed Recently?

Hubei Yihua Chemical Industry could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. It seems that many are expecting the poor revenue performance to persist, which has repressed the P/S ratio. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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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 Yihua Chemical Industry's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 5.2% decrease to the company's top line. However, a few very strong years before that means that it was still able to grow revenue by an impressive 36% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the one analyst covering the company suggest revenue growth is heading into negative territory, declining 1.4% over the next year. Meanwhile, the broader industry is forecast to expand by 23%, which paints a poor picture.

With this information, we are not surprised that Hubei Yihua Chemical Industry is trading at a P/S lower than the industry. However, shrinking revenues are unlikely to lead to a stable P/S over the longer term. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Final Word

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.

With revenue forecasts that are inferior to the rest of the industry, it's no surprise that Hubei Yihua Chemical Industry's P/S is on the lower end of the spectrum. As other companies in the industry are forecasting revenue growth, Hubei Yihua Chemical Industry's poor outlook justifies its low P/S ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you take the next step, you should know about the 5 warning signs for Hubei Yihua Chemical Industry that we have uncovered.

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.