Zhongfu Straits (Pingtan) Development Company Limited's (SZSE:000592) Shareholders Might Be Looking For Exit

When close to half the companies in the Forestry industry in China have price-to-sales ratios (or "P/S") below 1.7x, you may consider Zhongfu Straits (Pingtan) Development Company Limited (SZSE:000592) as a stock to avoid entirely with its 3.7x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Zhongfu Straits (Pingtan) Development

What Does Zhongfu Straits (Pingtan) Development's P/S Mean For Shareholders?

Zhongfu Straits (Pingtan) Development has been doing a good job lately as it's been growing revenue at a solid pace. One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be enough to outperform the broader industry in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Zhongfu Straits (Pingtan) Development will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For Zhongfu Straits (Pingtan) Development?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Zhongfu Straits (Pingtan) Development's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 24% last year. However, this wasn't enough as the latest three year period has seen the company endure a nasty 6.9% drop in revenue in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 14% shows it's an unpleasant look.

With this information, we find it concerning that Zhongfu Straits (Pingtan) Development 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. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Bottom Line On Zhongfu Straits (Pingtan) Development's P/S

While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We've established that Zhongfu Straits (Pingtan) Development 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. 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.

It is also worth noting that we have found 2 warning signs for Zhongfu Straits (Pingtan) Development (1 is potentially serious!) that you need to take into consideration.

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.