More Unpleasant Surprises Could Be In Store For Yunhong Green CTI Ltd.'s (NASDAQ:YHGJ) Shares After Tumbling 38%

Unfortunately for some shareholders, the Yunhong Green CTI Ltd. (NASDAQ:YHGJ) share price has dived 38% in the last thirty days, prolonging recent pain. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 32% share price drop.

Although its price has dipped substantially, you could still be forgiven for thinking Yunhong Green CTI is a stock not worth researching with a price-to-sales ratios (or "P/S") of 1.6x, considering almost half the companies in the United States' Consumer Durables industry have P/S ratios below 0.7x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Yunhong Green CTI

How Yunhong Green CTI Has Been Performing

For example, consider that Yunhong Green CTI's 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.

Although there are no analyst estimates available for Yunhong Green CTI, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Yunhong Green CTI would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered a frustrating 13% decrease to the company's top line. As a result, revenue from three years ago have also fallen 38% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 1.1% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Yunhong Green CTI's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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.

The Bottom Line On Yunhong Green CTI's P/S

Yunhong Green CTI's 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.

Our examination of Yunhong Green CTI revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. 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. If recent medium-term revenue trends continue, it will 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 3 warning signs for Yunhong Green CTI (1 is a bit unpleasant!) that you need to take into consideration.

If these risks are making you reconsider your opinion on Yunhong Green CTI, 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.