Some Jiangxi Hengda Hi-Tech Co.,Ltd. (SZSE:002591) Shareholders Look For Exit As Shares Take 25% Pounding

Jiangxi Hengda Hi-Tech Co.,Ltd. (SZSE:002591) shares have had a horrible month, losing 25% after a relatively good period beforehand. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 34% share price drop.

In spite of the heavy fall in price, you could still be forgiven for thinking Jiangxi Hengda Hi-TechLtd is a stock not worth researching with a price-to-sales ratios (or "P/S") of 3.1x, considering almost half the companies in China's Chemicals industry have P/S ratios below 2.2x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

View our latest analysis for Jiangxi Hengda Hi-TechLtd

How Jiangxi Hengda Hi-TechLtd Has Been Performing

Jiangxi Hengda Hi-TechLtd has been doing a good job lately as it's been growing revenue at a solid pace. One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Jiangxi Hengda Hi-TechLtd's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Jiangxi Hengda Hi-TechLtd?

In order to justify its P/S ratio, Jiangxi Hengda Hi-TechLtd would need to produce impressive growth in excess of the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 12% last year. However, this wasn't enough as the latest three year period has seen an unpleasant 15% overall drop in revenue. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 25% 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 find it concerning that Jiangxi Hengda Hi-TechLtd is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Key Takeaway

There's still some elevation in Jiangxi Hengda Hi-TechLtd's P/S, even if the same can't be said for its share price recently. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Jiangxi Hengda Hi-TechLtd revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Jiangxi Hengda Hi-TechLtd with six simple checks on some of these key factors.

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.