The Shandong Molong Petroleum Machinery Company Limited (HKG:568) share price has fared very poorly over the last month, falling by a substantial 40%. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 60% loss during that time.

Even after such a large drop in price, you could still be forgiven for feeling indifferent about Shandong Molong Petroleum Machinery's P/S ratio of 0.6x, since the median price-to-sales (or "P/S") ratio for the Energy Services industry in Hong Kong is also close to 0.3x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

What Does Shandong Molong Petroleum Machinery's Recent Performance Look Like?

For example, consider that Shandong Molong Petroleum Machinery's financial performance has been poor lately as its revenue has been in decline. 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 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.

How Is Shandong Molong Petroleum Machinery's Revenue Growth Trending?

In order to justify its P/S ratio, Shandong Molong Petroleum Machinery would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a frustrating 52% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 56% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 16% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we find it worrying that Shandong Molong Petroleum Machinery'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 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 Key Takeaway

With its share price dropping off a cliff, the P/S for Shandong Molong Petroleum Machinery looks to be in line with the rest of the Energy Services industry. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our look at Shandong Molong Petroleum Machinery 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. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Shandong Molong Petroleum Machinery that you should be aware of.

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.