Changjiang Runfa Health Industry Co., Ltd. (SZSE:002435) Looks Inexpensive After Falling 68% But Perhaps Not Attractive Enough

The Changjiang Runfa Health Industry Co., Ltd. (SZSE:002435) share price has fared very poorly over the last month, falling by a substantial 68%. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 80% loss during that time.

After such a large drop in price, Changjiang Runfa Health Industry's price-to-sales (or "P/S") ratio of 0.4x might make it look like a strong buy right now compared to the wider Pharmaceuticals industry in China, where around half of the companies have P/S ratios above 3.3x and even P/S above 6x are quite common. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Changjiang Runfa Health Industry

What Does Changjiang Runfa Health Industry's P/S Mean For Shareholders?

For instance, Changjiang Runfa Health Industry's receding revenue in recent times would have to be some food for thought. Perhaps the market believes the recent revenue performance isn't good enough to keep up the industry, causing the P/S ratio to suffer. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Changjiang Runfa Health Industry will help you shine a light on its historical performance.

Is There Any Revenue Growth Forecasted For Changjiang Runfa Health Industry?

Changjiang Runfa Health Industry's P/S ratio would be typical for a company that's expected to deliver very poor growth or even falling revenue, and importantly, perform much worse than the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 12%. This means it has also seen a slide in revenue over the longer-term as revenue is down 29% in total over the last three years. 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 19% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's understandable that Changjiang Runfa Health Industry's P/S would sit below the majority of other companies. 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. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Key Takeaway

Shares in Changjiang Runfa Health Industry have plummeted and its P/S has followed suit. 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.

It's no surprise that Changjiang Runfa Health Industry maintains its low P/S off the back of its sliding revenue over the medium-term. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Having said that, be aware Changjiang Runfa Health Industry is showing 1 warning sign in our investment analysis, you should know about.

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.