Guangdong Guanghua Sci-Tech Co., Ltd.'s (SZSE:002741) Stock Retreats 28% But Revenues Haven't Escaped The Attention Of Investors

Guangdong Guanghua Sci-Tech Co., Ltd. (SZSE:002741) shares have retraced a considerable 28% in the last month, reversing a fair amount of their solid recent performance. Longer-term, the stock has been solid despite a difficult 30 days, gaining 14% in the last year.

Even after such a large drop in price, given close to half the companies operating in China's Chemicals industry have price-to-sales ratios (or "P/S") below 2.2x, you may still consider Guangdong Guanghua Sci-Tech as a stock to potentially avoid with its 2.9x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

Check out our latest analysis for Guangdong Guanghua Sci-Tech

What Does Guangdong Guanghua Sci-Tech's Recent Performance Look Like?

Guangdong Guanghua Sci-Tech could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Keen to find out how analysts think Guangdong Guanghua Sci-Tech'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 High P/S?

Guangdong Guanghua Sci-Tech's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Retrospectively, the last year delivered a frustrating 3.3% decrease to the company's top line. This has erased any of its gains during the last three years, with practically no change in revenue being achieved in total. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

Turning to the outlook, the next year should generate growth of 72% as estimated by the one analyst watching the company. That's shaping up to be materially higher than the 25% growth forecast for the broader industry.

In light of this, it's understandable that Guangdong Guanghua Sci-Tech's P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Guangdong Guanghua Sci-Tech's P/S?

Guangdong Guanghua Sci-Tech's P/S remain high even after its stock plunged. 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.

As we suspected, our examination of Guangdong Guanghua Sci-Tech's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless these conditions change, they will continue to provide strong support to the share price.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Guangdong Guanghua Sci-Tech (2 shouldn't be ignored!) 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.