More Unpleasant Surprises Could Be In Store For Zhongrun Resources Investment Corporation's (SZSE:000506) Shares After Tumbling 45%

To the annoyance of some shareholders, Zhongrun Resources Investment Corporation (SZSE:000506) shares are down a considerable 45% in the last month, which continues a horrid run for the company. For any long-term shareholders, the last month ends a year to forget by locking in a 74% share price decline.

Although its price has dipped substantially, given around half the companies in China's Metals and Mining industry have price-to-sales ratios (or "P/S") below 1.2x, you may still consider Zhongrun Resources Investment as a stock to avoid entirely with its 3.6x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

Check out our latest analysis for Zhongrun Resources Investment

How Has Zhongrun Resources Investment Performed Recently?

For example, consider that Zhongrun Resources Investment's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. If not, then existing shareholders may be quite nervous about the viability 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 Zhongrun Resources Investment's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Zhongrun Resources Investment?

In order to justify its P/S ratio, Zhongrun Resources Investment would need to produce outstanding growth that's well in excess of the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 7.5%. This means it has also seen a slide in revenue over the longer-term as revenue is down 41% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 14% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we find it worrying that Zhongrun Resources Investment's P/S exceeds that of its industry peers. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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 Zhongrun Resources Investment's P/S

Zhongrun Resources Investment's shares may have suffered, but its P/S remains high. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Zhongrun Resources Investment currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. 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. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Having said that, be aware Zhongrun Resources Investment is showing 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com