Risks Still Elevated At These Prices As China Carbon Neutral Development Group Limited (HKG:1372) Shares Dive 30%

To the annoyance of some shareholders, China Carbon Neutral Development Group Limited (HKG:1372) shares are down a considerable 30% 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 76% share price decline.

Even after such a large drop in price, it's still not a stretch to say that China Carbon Neutral Development Group's price-to-sales (or "P/S") ratio of 0.5x right now seems quite "middle-of-the-road" compared to the Auto Components industry in Hong Kong, seeing as it matches the P/S ratio of the wider industry. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Check out our latest analysis for China Carbon Neutral Development Group

How China Carbon Neutral Development Group Has Been Performing

Recent times have been quite advantageous for China Carbon Neutral Development Group as its revenue has been rising very briskly. The P/S is probably moderate because investors think this strong revenue growth might not be enough to outperform the broader industry in the near future. If that doesn't eventuate, then existing shareholders have reason to 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 China Carbon Neutral Development Group's earnings, revenue and cash flow.

Is There Some Revenue Growth Forecasted For China Carbon Neutral Development Group?

In order to justify its P/S ratio, China Carbon Neutral Development Group would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered an exceptional 41% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 58% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 37% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this information, we find it interesting that China Carbon Neutral Development Group is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

What We Can Learn From China Carbon Neutral Development Group's P/S?

With its share price dropping off a cliff, the P/S for China Carbon Neutral Development Group looks to be in line with the rest of the Auto Components industry. 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.

Our examination of China Carbon Neutral Development Group revealed its poor three-year revenue trends aren't resulting in a lower P/S as per our expectations, given they look worse than current industry outlook. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. Unless the recent medium-term conditions improve, it's hard to accept the current share price as fair value.

There are also other vital risk factors to consider and we've discovered 3 warning signs for China Carbon Neutral Development Group (2 don't sit too well with us!) that you should be aware of before investing here.

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.