Some Confidence Is Lacking In Dongwu Cement International Limited's (HKG:695) P/S

When you see that almost half of the companies in the Basic Materials industry in Hong Kong have price-to-sales ratios (or "P/S") below 0.4x, Dongwu Cement International Limited (HKG:695) looks to be giving off strong sell signals with its 4.5x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Dongwu Cement International

How Has Dongwu Cement International Performed Recently?

For example, consider that Dongwu Cement International's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. If not, then existing shareholders may be quite nervous about the viability 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 Dongwu Cement International's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Dongwu Cement International?

The only time you'd be truly comfortable seeing a P/S as steep as Dongwu Cement International's is when the company's growth is on track to outshine the industry decidedly.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 40%. This means it has also seen a slide in revenue over the longer-term as revenue is down 43% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to decline by 4.8% over the next year, or less than the company's recent medium-term annualised revenue decline.

In light of this, it's odd that Dongwu Cement International's P/S sits above the majority of other companies. With revenue going quickly in reverse, it's not guaranteed that the P/S has found a floor yet. Maintaining these prices will be extremely difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

What We Can Learn From Dongwu Cement International's P/S?

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Dongwu Cement International currently trades on a much higher than expected P/S since its recent three-year revenues are even worse than the forecasts for a struggling industry. When we see below average revenue, we suspect the share price is at risk of declining, sending the high P/S lower. We're also cautious about the company's ability to stay its recent medium-term course and resist even greater pain to its business from the broader industry turmoil. This would place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It is also worth noting that we have found 2 warning signs for Dongwu Cement International (1 is a bit concerning!) that you need to take into consideration.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.