Some Confidence Is Lacking In Changzhou Tronly New Electronic Materials Co., Ltd. (SZSE:300429) As Shares Slide 26%

Changzhou Tronly New Electronic Materials Co., Ltd. (SZSE:300429) shareholders won't be pleased to see that the share price has had a very rough month, dropping 26% and undoing the prior period's positive performance. Longer-term shareholders would now have taken a real hit with the stock declining 8.5% in the last year.

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 2.3x, you may still consider Changzhou Tronly New Electronic Materials as a stock not worth researching with its 6.3x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Changzhou Tronly New Electronic Materials

What Does Changzhou Tronly New Electronic Materials' Recent Performance Look Like?

The revenue growth achieved at Changzhou Tronly New Electronic Materials over the last year would be more than acceptable for most companies. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Changzhou Tronly New Electronic Materials will help you shine a light on its historical performance.

How Is Changzhou Tronly New Electronic Materials' Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Changzhou Tronly New Electronic Materials' to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 15% last year. Still, revenue has fallen 4.0% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

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.

In light of this, it's alarming that Changzhou Tronly New Electronic Materials' 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.

The Key Takeaway

A significant share price dive has done very little to deflate Changzhou Tronly New Electronic Materials' 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.

Our examination of Changzhou Tronly New Electronic Materials 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. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Changzhou Tronly New Electronic Materials (2 make us uncomfortable!) that you should be aware of before investing here.

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.