Shanghai Anoky Group Co., Ltd's (SZSE:300067) Popularity With Investors Under Threat As Stock Sinks 28%

Shanghai Anoky Group Co., Ltd (SZSE:300067) shares have had a horrible month, losing 28% after a relatively good period beforehand. Still, a bad month hasn't completely ruined the past year with the stock gaining 48%, which is great even in a bull market.

Even after such a large drop in price, when almost half of the companies in China's Chemicals industry have price-to-sales ratios (or "P/S") below 2.2x, you may still consider Shanghai Anoky Group as a stock not worth researching with its 5.5x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for Shanghai Anoky Group

What Does Shanghai Anoky Group's P/S Mean For Shareholders?

The revenue growth achieved at Shanghai Anoky Group over the last year would be more than acceptable for most companies. Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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 Shanghai Anoky Group's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Shanghai Anoky Group?

The only time you'd be truly comfortable seeing a P/S as steep as Shanghai Anoky Group's is when the company's growth is on track to outshine the industry decidedly.

If we review the last year of revenue growth, the company posted a terrific increase of 30%. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 9.1% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 25% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's alarming that Shanghai Anoky Group's P/S sits above the majority of other companies. 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.

What Does Shanghai Anoky Group's P/S Mean For Investors?

A significant share price dive has done very little to deflate Shanghai Anoky Group's very lofty P/S. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that Shanghai Anoky Group currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

Before you take the next step, you should know about the 5 warning signs for Shanghai Anoky Group (3 are significant!) that we have uncovered.

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.