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China Environmental Technology and Bioenergy Holdings Limited (HKG:1237) shares have had a really impressive month, gaining 45% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 11% in the last twelve months.

Even after such a large jump in price, given about half the companies operating in Hong Kong's Leisure industry have price-to-sales ratios (or "P/S") above 0.6x, you may still consider China Environmental Technology and Bioenergy Holdings as an attractive investment with its 0.1x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

View our latest analysis for China Environmental Technology and Bioenergy Holdings

How Has China Environmental Technology and Bioenergy Holdings Performed Recently?

For example, consider that China Environmental Technology and Bioenergy Holdings' financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

Is There Any Revenue Growth Forecasted For China Environmental Technology and Bioenergy Holdings?

There's an inherent assumption that a company should underperform the industry for P/S ratios like China Environmental Technology and Bioenergy Holdings' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 11% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 34% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 11% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's understandable that China Environmental Technology and Bioenergy Holdings' P/S would sit below the majority of other companies. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Final Word

China Environmental Technology and Bioenergy Holdings' stock price has surged recently, but its but its P/S still remains modest. 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.

It's no surprise that China Environmental Technology and Bioenergy Holdings maintains its low P/S off the back of its sliding revenue over the medium-term. 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.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for China Environmental Technology and Bioenergy Holdings that you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.