Changzhou Tronly New Electronic Materials Co., Ltd. (SZSE:300429) Shares May Have Slumped 26% But Getting In Cheap Is Still Unlikely

Changzhou Tronly New Electronic Materials Co., Ltd. (SZSE:300429) shares have had a horrible month, losing 26% after a relatively good period beforehand. The last month has meant the stock is now only up 4.3% during the last year.

Although its price has dipped substantially, you could still be forgiven for thinking Changzhou Tronly New Electronic Materials is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 6.2x, considering almost half the companies in China's Chemicals industry have P/S ratios below 2x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for Changzhou Tronly New Electronic Materials

How Changzhou Tronly New Electronic Materials Has Been Performing

For example, consider that Changzhou Tronly New Electronic Materials' financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Is There Enough Revenue Growth Forecasted For Changzhou Tronly New Electronic Materials?

In order to justify its P/S ratio, Changzhou Tronly New Electronic Materials would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a frustrating 24% 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. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 21% shows it's an unpleasant look.

With this in mind, we find it worrying that Changzhou Tronly New Electronic Materials' P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What We Can Learn From Changzhou Tronly New Electronic Materials' P/S?

Even after such a strong price drop, Changzhou Tronly New Electronic Materials' P/S still exceeds the industry median significantly. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Changzhou Tronly New Electronic Materials currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. 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. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Changzhou Tronly New Electronic Materials, and understanding these should be part of your investment process.

If these risks are making you reconsider your opinion on Changzhou Tronly New Electronic Materials, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.