SafBon Water Service (Holding) Inc.,Shanghai (SZSE:300262) Looks Inexpensive After Falling 37% But Perhaps Not Attractive Enough

To the annoyance of some shareholders, SafBon Water Service (Holding) Inc.,Shanghai (SZSE:300262) shares are down a considerable 37% in the last month, which continues a horrid run for the company. For any long-term shareholders, the last month ends a year to forget by locking in a 74% share price decline.

After such a large drop in price, given about half the companies operating in China's Water Utilities industry have price-to-sales ratios (or "P/S") above 2.4x, you may consider SafBon Water Service (Holding)Shanghai as an attractive investment with its 1.8x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

View our latest analysis for SafBon Water Service (Holding)Shanghai

How Has SafBon Water Service (Holding)Shanghai Performed Recently?

For instance, SafBon Water Service (Holding)Shanghai'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. Those who are bullish on SafBon Water Service (Holding)Shanghai 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 SafBon Water Service (Holding)Shanghai'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, SafBon Water Service (Holding)Shanghai would need to produce sluggish growth that's trailing the industry.

Retrospectively, the last year delivered a frustrating 8.7% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 17% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 11% shows it's an unpleasant look.

In light of this, it's understandable that SafBon Water Service (Holding)Shanghai'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. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

The Final Word

The southerly movements of SafBon Water Service (Holding)Shanghai's shares means its P/S is now sitting at a pretty low level. 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.

It's no surprise that SafBon Water Service (Holding)Shanghai maintains its low P/S off the back of its sliding revenue over the medium-term. 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.

You should always think about risks. Case in point, we've spotted 4 warning signs for SafBon Water Service (Holding)Shanghai you should be aware of, and 3 of them make us uncomfortable.

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