Why Investors Shouldn't Be Surprised By Lianhe Chemical Technology Co.,Ltd.'s (SZSE:002250) Low P/S

With a price-to-sales (or "P/S") ratio of 0.8x Lianhe Chemical Technology Co.,Ltd. (SZSE:002250) may be sending bullish signals at the moment, given that almost half of all the Chemicals companies in China have P/S ratios greater than 2x and even P/S higher than 4x are not unusual. 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 Lianhe Chemical TechnologyLtd

What Does Lianhe Chemical TechnologyLtd's Recent Performance Look Like?

While the industry has experienced revenue growth lately, Lianhe Chemical TechnologyLtd's revenue has gone into reverse gear, which is not great. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Keen to find out how analysts think Lianhe Chemical TechnologyLtd's future stacks up against the industry? In that case, our free report is a great place to start.

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

There's an inherent assumption that a company should underperform the industry for P/S ratios like Lianhe Chemical TechnologyLtd's to be considered reasonable.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 27%. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 7.6% in total. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Looking ahead now, revenue is anticipated to climb by 14% during the coming year according to the dual analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 23%, which is noticeably more attractive.

In light of this, it's understandable that Lianhe Chemical TechnologyLtd's P/S sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From Lianhe Chemical TechnologyLtd's P/S?

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As expected, our analysis of Lianhe Chemical TechnologyLtd's analyst forecasts confirms that the company's underwhelming revenue outlook is a major contributor to its low P/S. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. The company will need a change of fortune to justify the P/S rising higher in the future.

You should always think about risks. Case in point, we've spotted 1 warning sign for Lianhe Chemical TechnologyLtd you should be aware of.

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.