You may think that with a price-to-sales (or "P/S") ratio of 1.3x Guangdong Xinhui Meida Nylon Co., Ltd. (SZSE:000782) is a stock worth checking out, seeing as almost half of all the Chemicals companies in China have P/S ratios greater than 2.1x and even P/S higher than 5x aren't out of the ordinary. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Guangdong Xinhui Meida Nylon

What Does Guangdong Xinhui Meida Nylon's P/S Mean For Shareholders?

Guangdong Xinhui Meida Nylon hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

How Is Guangdong Xinhui Meida Nylon's Revenue Growth Trending?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Guangdong Xinhui Meida Nylon's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 16% decrease to the company's top line. Regardless, revenue has managed to lift by a handy 15% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Turning to the outlook, the next year should generate growth of 1.4% as estimated by the only analyst watching the company. With the industry predicted to deliver 27% growth, the company is positioned for a weaker revenue result.

With this information, we can see why Guangdong Xinhui Meida Nylon is trading at a P/S lower than the industry. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What Does Guangdong Xinhui Meida Nylon's P/S Mean For Investors?

While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We've established that Guangdong Xinhui Meida Nylon maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. The company will need a change of fortune to justify the P/S rising higher in the future.

It is also worth noting that we have found 1 warning sign for Guangdong Xinhui Meida Nylon 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.