Hanshang Group Co., Ltd.'s (SHSE:600774) 26% Dip In Price Shows Sentiment Is Matching Revenues

Hanshang Group Co., Ltd. (SHSE:600774) shares have had a horrible month, losing 26% after a relatively good period beforehand. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 29% in that time.

After such a large drop in price, Hanshang Group's price-to-sales (or "P/S") ratio of 1.5x might make it look like a buy right now compared to the Pharmaceuticals industry in China, where around half of the companies have P/S ratios above 3.2x and even P/S above 7x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

See our latest analysis for Hanshang Group

How Has Hanshang Group Performed Recently?

For instance, Hanshang Group's receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future. Those who are bullish on Hanshang Group will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

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 Hanshang Group's earnings, revenue and cash flow.

What Are Revenue Growth Metrics Telling Us About The Low P/S?

In order to justify its P/S ratio, Hanshang Group would need to produce sluggish growth that's trailing the industry.

Retrospectively, the last year delivered a frustrating 7.4% decrease to the company's top line. As a result, revenue from three years ago have also fallen 12% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 177% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we are not surprised that Hanshang Group is trading at a P/S lower than the industry. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

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

Hanshang Group's P/S has taken a dip along with its share price. 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.

As we suspected, our examination of Hanshang Group revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Given the current circumstances, it seems unlikely that the share price will experience any significant movement in either direction in the near future if recent medium-term revenue trends persist.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Hanshang Group with six simple checks on some of these key factors.

If you're unsure about the strength of Hanshang Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.