Why Investors Shouldn't Be Surprised By Anhui Guofeng New Materials Co., Ltd.'s (SZSE:000859) P/S

It's not a stretch to say that Anhui Guofeng New Materials Co., Ltd.'s (SZSE:000859) price-to-sales (or "P/S") ratio of 1.4x right now seems quite "middle-of-the-road" for companies in the Packaging industry in China, where the median P/S ratio is around 1.7x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

View our latest analysis for Anhui Guofeng New Materials

What Does Anhui Guofeng New Materials' P/S Mean For Shareholders?

For example, consider that Anhui Guofeng New Materials' financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is moderate because investors think the company might still do enough to be in line with the broader industry in the near future. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

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

Is There Some Revenue Growth Forecasted For Anhui Guofeng New Materials?

In order to justify its P/S ratio, Anhui Guofeng New Materials would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a frustrating 1.7% decrease to the company's top line. Even so, admirably revenue has lifted 67% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

It's interesting to note that the rest of the industry is similarly expected to grow by 17% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Anhui Guofeng New Materials' P/S sits in line with the majority of other companies. Apparently shareholders are comfortable to simply hold on assuming the company will continue keeping a low profile.

The Bottom Line On Anhui Guofeng New Materials' P/S

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

It appears to us that Anhui Guofeng New Materials maintains its moderate P/S off the back of its recent three-year growth being in line with the wider industry forecast. Currently, with a past revenue trend that aligns closely wit the industry outlook, shareholders are confident the company's future revenue outlook won't contain any major surprises. Given the current circumstances, it seems improbable that the share price will experience any significant movement in either direction in the near future if recent medium-term revenue trends persist.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Anhui Guofeng New Materials, and understanding these should be part of your investment process.

If you're unsure about the strength of Anhui Guofeng New Materials' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.