Why Investors Shouldn't Be Surprised By Nanjing Red Sun Co.,Ltd.'s (SZSE:000525) 25% Share Price Plunge

The Nanjing Red Sun Co.,Ltd. (SZSE:000525) share price has softened a substantial 25% over the previous 30 days, handing back much of the gains the stock has made lately. Indeed, the recent drop has reduced its annual gain to a relatively sedate 5.6% over the last twelve months.

Since its price has dipped substantially, Nanjing Red SunLtd's price-to-sales (or "P/S") ratio of 1.2x might make it look like a buy right now compared to the Chemicals industry in China, where around half of the companies have P/S ratios above 2.2x and even P/S above 5x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

View our latest analysis for Nanjing Red SunLtd

How Nanjing Red SunLtd Has Been Performing

For instance, Nanjing Red SunLtd's receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Nanjing Red SunLtd will help you shine a light on its historical performance.

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

In order to justify its P/S ratio, Nanjing Red SunLtd would need to produce sluggish growth that's trailing the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 41%. As a result, revenue from three years ago have also fallen 20% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

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 in mind, we understand why Nanjing Red SunLtd's P/S is lower than most of its industry peers. 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 Key Takeaway

Nanjing Red SunLtd's P/S has taken a dip along with its share price. 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.

As we suspected, our examination of Nanjing Red SunLtd revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. If recent medium-term revenue trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

It is also worth noting that we have found 1 warning sign for Nanjing Red SunLtd that you need to take into consideration.

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.