Why Investors Shouldn't Be Surprised By Sichuan Yahua Industrial Group Co., Ltd.'s (SZSE:002497) Low P/S

You may think that with a price-to-sales (or "P/S") ratio of 1.7x Sichuan Yahua Industrial Group Co., Ltd. (SZSE:002497) is a stock worth checking out, seeing as almost half of all the Chemicals companies in China have P/S ratios greater than 2.2x and even P/S higher than 5x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

View our latest analysis for Sichuan Yahua Industrial Group

How Has Sichuan Yahua Industrial Group Performed Recently?

While the industry has experienced revenue growth lately, Sichuan Yahua Industrial Group's revenue has gone into reverse gear, which is not great. 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.

Want the full picture on analyst estimates for the company? Then our free report on Sichuan Yahua Industrial Group will help you uncover what's on the horizon.

How Is Sichuan Yahua Industrial Group's Revenue Growth Trending?

In order to justify its P/S ratio, Sichuan Yahua Industrial Group would need to produce sluggish growth that's trailing the industry.

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 40%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 86% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Looking ahead now, revenue is anticipated to slump, contracting by 0.7% during the coming year according to the two analysts following the company. With the industry predicted to deliver 24% growth, that's a disappointing outcome.

With this information, we are not surprised that Sichuan Yahua Industrial Group 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.

What Does Sichuan Yahua Industrial Group's P/S Mean For Investors?

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.

With revenue forecasts that are inferior to the rest of the industry, it's no surprise that Sichuan Yahua Industrial Group's P/S is on the lower end of the spectrum. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Sichuan Yahua Industrial Group with six simple checks.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.