Guangdong Zhongnan Iron and Steel Co., Ltd. (SZSE:000717) Held Back By Insufficient Growth Even After Shares Climb 27%

Despite an already strong run, Guangdong Zhongnan Iron and Steel Co., Ltd. (SZSE:000717) shares have been powering on, with a gain of 27% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 39% in the last year.

Even after such a large jump in price, Guangdong Zhongnan Iron and Steel's price-to-sales (or "P/S") ratio of 0.3x might still make it look like a buy right now compared to the Metals and Mining industry in China, where around half of the companies have P/S ratios above 1.5x and even P/S above 4x 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.

Check out our latest analysis for Guangdong Zhongnan Iron and Steel

What Does Guangdong Zhongnan Iron and Steel's Recent Performance Look Like?

For example, consider that Guangdong Zhongnan Iron and Steel's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. 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 Guangdong Zhongnan Iron and Steel will help you shine a light on its historical performance.

Is There Any Revenue Growth Forecasted For Guangdong Zhongnan Iron and Steel?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Guangdong Zhongnan Iron and Steel's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 22% decrease to the company's top line. As a result, revenue from three years ago have also fallen 24% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

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 information, we are not surprised that Guangdong Zhongnan Iron and Steel is trading at a P/S lower than the industry. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Key Takeaway

The latest share price surge wasn't enough to lift Guangdong Zhongnan Iron and Steel's P/S close to the industry median. 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.

Our examination of Guangdong Zhongnan Iron and Steel confirms that the company's shrinking revenue over the past medium-term is a key factor in its low price-to-sales ratio, given the industry is projected 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's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Guangdong Zhongnan Iron and Steel (at least 1 which can't be ignored), and understanding these should be part of your investment process.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.