Guangdong Delian Group Co., Ltd.'s (SZSE:002666) Shares Lagging The Industry But So Is The Business

You may think that with a price-to-sales (or "P/S") ratio of 0.5x Guangdong Delian Group Co., Ltd. (SZSE:002666) is a stock worth checking out, seeing as almost half of all the Chemicals companies in China have P/S ratios greater than 1.9x and even P/S higher than 4x 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 Guangdong Delian Group

What Does Guangdong Delian Group's P/S Mean For Shareholders?

Guangdong Delian Group has been doing a good job lately as it's been growing revenue at a solid pace. Perhaps the market is expecting this acceptable revenue performance to take a dive, which has kept the P/S suppressed. If you 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.

Although there are no analyst estimates available for Guangdong Delian Group, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Do Revenue Forecasts Match The Low P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as low as Guangdong Delian Group's is when the company's growth is on track to lag the industry.

Retrospectively, the last year delivered a decent 12% gain to the company's revenues. This was backed up an excellent period prior to see revenue up by 39% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenues over that time.

Comparing that to the industry, which is predicted to deliver 18% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this information, we can see why Guangdong Delian Group is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

The Bottom Line On Guangdong Delian Group's P/S

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 Guangdong Delian Group confirms that the company's revenue trends over the past three-year years are a key factor in its low price-to-sales ratio, as we suspected, given they fall short of current industry expectations. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

It is also worth noting that we have found 2 warning signs for Guangdong Delian Group (1 is significant!) that you need to take into consideration.

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.