The Highbroad Advanced Material (Hefei) Co., Ltd. (SZSE:301321) share price has fared very poorly over the last month, falling by a substantial 25%. The recent drop has obliterated the annual return, with the share price now down 3.3% over that longer period.

Following the heavy fall in price, Highbroad Advanced Material (Hefei)'s price-to-sales (or "P/S") ratio of 1.2x might make it look like a strong buy right now compared to the wider Semiconductor industry in China, where around half of the companies have P/S ratios above 5.8x and even P/S above 10x are quite common. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

What Does Highbroad Advanced Material (Hefei)'s P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Highbroad Advanced Material (Hefei) over the last year, which is not ideal at all. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. Those who are bullish on Highbroad Advanced Material (Hefei) will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

Do Revenue Forecasts Match The Low P/S Ratio?

Highbroad Advanced Material (Hefei)'s P/S ratio would be typical for a company that's expected to deliver very poor growth or even falling revenue, and importantly, perform much worse than the industry.

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 27%. This means it has also seen a slide in revenue over the longer-term as revenue is down 15% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 34% 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 understand why Highbroad Advanced Material (Hefei)'s P/S is lower than most of its industry peers. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

The Key Takeaway

Having almost fallen off a cliff, Highbroad Advanced Material (Hefei)'s share price has pulled its P/S way down as well. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Highbroad Advanced Material (Hefei) confirms that the company's shrinking revenue over the past medium-term is a key factor in its low price-to-sales ratio, given the industry is projected to grow. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. If recent medium-term revenue trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with Highbroad Advanced Material (Hefei), and understanding them should be part of your investment process.

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.