Risks To Shareholder Returns Are Elevated At These Prices For Shunfeng International Clean Energy Limited (HKG:1165)

It's not a stretch to say that Shunfeng International Clean Energy Limited's (HKG:1165) price-to-sales (or "P/S") ratio of 0.3x right now seems quite "middle-of-the-road" for companies in the Renewable Energy industry in Hong Kong, where the median P/S ratio is around 0.7x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Check out our latest analysis for Shunfeng International Clean Energy

How Shunfeng International Clean Energy Has Been Performing

As an illustration, revenue has deteriorated at Shunfeng International Clean Energy over the last year, which is not ideal at all. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. If not, then existing shareholders may be a little nervous about the viability of the share price.

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

What Are Revenue Growth Metrics Telling Us About The P/S?

In order to justify its P/S ratio, Shunfeng International Clean Energy would need to produce growth that's similar to the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 39%. As a result, revenue from three years ago have also fallen 81% overall. 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 5.3% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that Shunfeng International Clean Energy is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

The Bottom Line On Shunfeng International Clean Energy's P/S

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 look at Shunfeng International Clean Energy revealed its shrinking revenues over the medium-term haven't impacted the P/S as much as we anticipated, given the industry is set to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Shunfeng International Clean Energy you should know about.

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.