China Smarter Energy Group Holdings Limited's (HKG:1004) 36% Dip Still Leaving Some Shareholders Feeling Restless Over Its P/SRatio

China Smarter Energy Group Holdings Limited (HKG:1004) shares have had a horrible month, losing 36% after a relatively good period beforehand. To make matters worse, the recent drop has wiped out a year's worth of gains with the share price now back where it started a year ago.

Even after such a large drop in price, given close to half the companies operating in Hong Kong's Renewable Energy industry have price-to-sales ratios (or "P/S") below 0.8x, you may still consider China Smarter Energy Group Holdings as a stock to potentially avoid with its 1.7x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

See our latest analysis for China Smarter Energy Group Holdings

How Has China Smarter Energy Group Holdings Performed Recently?

For example, consider that China Smarter Energy Group Holdings' financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on China Smarter Energy Group Holdings will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For China Smarter Energy Group Holdings?

There's an inherent assumption that a company should outperform the industry for P/S ratios like China Smarter Energy Group Holdings' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 3.6% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 83% in aggregate. 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 4.1% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's alarming that China Smarter Energy Group Holdings' P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What We Can Learn From China Smarter Energy Group Holdings' P/S?

China Smarter Energy Group Holdings' P/S remain high even after its stock plunged. 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.

We've established that China Smarter Energy Group Holdings currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Having said that, be aware China Smarter Energy Group Holdings is showing 4 warning signs in our investment analysis, and 3 of those are concerning.

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.