Some Confidence Is Lacking In GuoCheng Mining CO.,LTD (SZSE:000688) As Shares Slide 26%

GuoCheng Mining CO.,LTD (SZSE:000688) shareholders won't be pleased to see that the share price has had a very rough month, dropping 26% and undoing the prior period's positive performance. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 37% in that time.

Even after such a large drop in price, you could still be forgiven for thinking GuoCheng MiningLTD is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 8.6x, considering almost half the companies in China's Metals and Mining industry have P/S ratios below 1.2x. 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 GuoCheng MiningLTD

What Does GuoCheng MiningLTD's Recent Performance Look Like?

For example, consider that GuoCheng MiningLTD'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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

How Is GuoCheng MiningLTD's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as GuoCheng MiningLTD's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered a frustrating 18% decrease to the company's top line. Regardless, revenue has managed to lift by a handy 30% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 14% shows it's noticeably less attractive.

In light of this, it's alarming that GuoCheng MiningLTD's P/S sits above the majority of other companies. 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.

What Does GuoCheng MiningLTD's P/S Mean For Investors?

A significant share price dive has done very little to deflate GuoCheng MiningLTD's very lofty 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.

Our examination of GuoCheng MiningLTD revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

And what about other risks? Every company has them, and we've spotted 4 warning signs for GuoCheng MiningLTD (of which 1 is significant!) you should know about.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.

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