Dafeng Port Heshun Technology Company Limited (HKG:8310) shareholders that were waiting for something to happen have been dealt a blow with a 26% share price drop in the last month. Of course, over the longer-term many would still wish they owned shares as the stock's price has soared 159% in the last twelve months.

Even after such a large drop in price, there still wouldn't be many who think Dafeng Port Heshun Technology's price-to-sales (or "P/S") ratio of 0.3x is worth a mention when the median P/S in Hong Kong's Trade Distributors industry is similar at about 0.6x. 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.

How Dafeng Port Heshun Technology Has Been Performing

With revenue growth that's exceedingly strong of late, Dafeng Port Heshun Technology has been doing very well. The P/S is probably moderate because investors think this strong revenue growth might not be enough to outperform the broader industry in the near future. Those who are bullish on Dafeng Port Heshun Technology will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

How Is Dafeng Port Heshun Technology's Revenue Growth Trending?

Dafeng Port Heshun Technology's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 128%. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 46% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 27% shows it's an unpleasant look.

In light of this, it's somewhat alarming that Dafeng Port Heshun Technology's P/S sits in line with the majority of other companies. 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 Dafeng Port Heshun Technology's P/S

With its share price dropping off a cliff, the P/S for Dafeng Port Heshun Technology looks to be in line with the rest of the Trade Distributors industry. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We find it unexpected that Dafeng Port Heshun Technology trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected 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. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

And what about other risks? Every company has them, and we've spotted 4 warning signs for Dafeng Port Heshun Technology (of which 3 make us uncomfortable!) you should know about.

If these risks are making you reconsider your opinion on Dafeng Port Heshun Technology, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.