Zhejiang Runtu Co., Ltd.'s (SZSE:002440) Price Is Right But Growth Is Lacking

You may think that with a price-to-sales (or "P/S") ratio of 1.4x Zhejiang Runtu Co., Ltd. (SZSE:002440) is a stock worth checking out, seeing as almost half of all the Chemicals companies in China have P/S ratios greater than 2.3x and even P/S higher than 5x aren't out of the ordinary. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Zhejiang Runtu

What Does Zhejiang Runtu's P/S Mean For Shareholders?

Zhejiang Runtu could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. 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.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Zhejiang Runtu.

Is There Any Revenue Growth Forecasted For Zhejiang Runtu?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Zhejiang Runtu'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 3.0%. As a result, revenue from three years ago have also fallen 6.5% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Shifting to the future, estimates from the lone analyst covering the company suggest revenue should grow by 5.6% over the next year. Meanwhile, the rest of the industry is forecast to expand by 24%, which is noticeably more attractive.

With this in consideration, its clear as to why Zhejiang Runtu's P/S is falling short industry peers. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

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.

As we suspected, our examination of Zhejiang Runtu's analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. The company will need a change of fortune to justify the P/S rising higher in the future.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Zhejiang Runtu (1 doesn't sit too well with us!) that you need to be mindful of.

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.