Hongli Group Inc.'s (NASDAQ:HLP) 28% Share Price Plunge Could Signal Some Risk

Hongli Group Inc. (NASDAQ:HLP) shareholders won't be pleased to see that the share price has had a very rough month, dropping 28% and undoing the prior period's positive performance. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 11% share price drop.

In spite of the heavy fall in price, you could still be forgiven for feeling indifferent about Hongli Group's P/S ratio of 1.2x, since the median price-to-sales (or "P/S") ratio for the Metals and Mining industry in the United States is about the same. 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.

Check out our latest analysis for Hongli Group

How Has Hongli Group Performed Recently?

For instance, Hongli Group's receding revenue in recent times would have to be some food for thought. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

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

Is There Some Revenue Growth Forecasted For Hongli Group?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Hongli Group's to be considered reasonable.

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 25%. As a result, revenue from three years ago have also fallen 15% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 21% 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 Hongli Group 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 Hongli Group's P/S

With its share price dropping off a cliff, the P/S for Hongli Group looks to be in line with the rest of the Metals and Mining industry. 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.

The fact that Hongli Group currently trades at a P/S on par with the rest of the industry is surprising to us since its recent revenues have been in decline over the medium-term, all while 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. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 5 warning signs with Hongli Group (at least 2 which don't sit too well with us), and understanding them should be part of your investment process.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.