China Risun Group Limited's (HKG:1907) Share Price Not Quite Adding Up

With a median price-to-sales (or "P/S") ratio of close to 0.4x in the Chemicals industry in Hong Kong, you could be forgiven for feeling indifferent about China Risun Group Limited's (HKG:1907) P/S ratio of 0.2x. 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.

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Check out our latest analysis for China Risun Group

How China Risun Group Has Been Performing

Recent revenue growth for China Risun Group has been in line with the industry. Perhaps the market is expecting future revenue performance to show no drastic signs of changing, justifying the P/S being at current levels. Those who are bullish on China Risun Group will be hoping that revenue performance can pick up, so that they can pick up the stock at a slightly lower valuation.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on China Risun Group.

Do Revenue Forecasts Match The P/S Ratio?

The only time you'd be comfortable seeing a P/S like China Risun Group's is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered a decent 3.2% gain to the company's revenues. The latest three year period has also seen a 21% overall rise in revenue, aided somewhat by its short-term performance. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Turning to the outlook, the next three years should generate growth of 5.7% each year as estimated by the two analysts watching the company. That's shaping up to be materially lower than the 7.7% each year growth forecast for the broader industry.

In light of this, it's curious that China Risun Group's P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

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.

Given that China Risun Group's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. A positive change is needed in order to justify the current price-to-sales ratio.

Having said that, be aware China Risun Group is showing 3 warning signs in our investment analysis, and 1 of those is concerning.

If these risks are making you reconsider your opinion on China Risun Group, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.