Huadian Liaoning Energy Development Co.,Ltd's (SHSE:600396) Business And Shares Still Trailing The Industry

Huadian Liaoning Energy Development Co.,Ltd's (SHSE:600396) price-to-sales (or "P/S") ratio of 0.8x may look like a pretty appealing investment opportunity when you consider close to half the companies in the Electric Utilities industry in China have P/S ratios greater than 1.4x. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Huadian Liaoning Energy DevelopmentLtd

How Huadian Liaoning Energy DevelopmentLtd Has Been Performing

For example, consider that Huadian Liaoning Energy DevelopmentLtd's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

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 Huadian Liaoning Energy DevelopmentLtd's earnings, revenue and cash flow.

Do Revenue Forecasts Match The Low P/S Ratio?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Huadian Liaoning Energy DevelopmentLtd's to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 29%. The last three years don't look nice either as the company has shrunk revenue by 29% in aggregate. 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 8.0% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we understand why Huadian Liaoning Energy DevelopmentLtd's P/S is lower than most of its industry peers. 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 Bottom Line On Huadian Liaoning Energy DevelopmentLtd's P/S

While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

As we suspected, our examination of Huadian Liaoning Energy DevelopmentLtd 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. If recent medium-term revenue trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Huadian Liaoning Energy DevelopmentLtd that you need to be mindful of.

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.