Lacklustre Performance Is Driving Huadian Liaoning Energy Development Co.,Ltd's (SHSE:600396) 27% Price Drop

The Huadian Liaoning Energy Development Co.,Ltd (SHSE:600396) share price has softened a substantial 27% over the previous 30 days, handing back much of the gains the stock has made lately. Indeed, the recent drop has reduced its annual gain to a relatively sedate 9.3% over the last twelve months.

Since its price has dipped substantially, considering around half the companies operating in China's Electric Utilities industry have price-to-sales ratios (or "P/S") above 1.5x, you may consider Huadian Liaoning Energy DevelopmentLtd as an solid investment opportunity with its 0.7x P/S ratio. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Huadian Liaoning Energy DevelopmentLtd

How Has Huadian Liaoning Energy DevelopmentLtd Performed Recently?

For example, consider that Huadian Liaoning Energy DevelopmentLtd's financial performance has been poor lately as its revenue has been in decline. 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 Huadian Liaoning Energy DevelopmentLtd will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

Although there are no analyst estimates available for Huadian Liaoning Energy DevelopmentLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Do Revenue Forecasts Match The Low P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as low as Huadian Liaoning Energy DevelopmentLtd's is when the company's growth is on track to lag the industry.

Retrospectively, the last year delivered a frustrating 20% decrease to the company's top line. As a result, revenue from three years ago have also fallen 24% overall. 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 7.8% 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 Huadian Liaoning Energy DevelopmentLtd's P/S would sit below the majority of other companies. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

What We Can Learn From Huadian Liaoning Energy DevelopmentLtd's P/S?

Huadian Liaoning Energy DevelopmentLtd's P/S has taken a dip along with its share price. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

It's no surprise that Huadian Liaoning Energy DevelopmentLtd 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. 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.

It is also worth noting that we have found 1 warning sign for Huadian Liaoning Energy DevelopmentLtd that you need to take into consideration.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com