The Xinte Energy Co., Ltd. (HKG:1799) share price has fared very poorly over the last month, falling by a substantial 27%. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 48% in that time.
Even after such a large drop in price, you could still be forgiven for feeling indifferent about Xinte Energy's P/S ratio of 0.3x, since the median price-to-sales (or "P/S") ratio for the Construction industry in Hong Kong is about the same. 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.
See our latest analysis for Xinte Energy
How Xinte Energy Has Been Performing
Xinte Energy 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. One possibility is that the P/S ratio is moderate because investors think this poor revenue performance will turn around. However, if this isn't the case, investors might get caught out paying too much for the stock.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Xinte Energy.Do Revenue Forecasts Match The P/S Ratio?
There's an inherent assumption that a company should be matching the industry for P/S ratios like Xinte Energy's to be considered reasonable.
Retrospectively, the last year delivered a frustrating 37% decrease to the company's top line. However, a few very strong years before that means that it was still able to grow revenue by an impressive 34% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.
Looking ahead now, revenue is anticipated to slump, contracting by 7.7% during the coming year according to the two analysts following the company. That's not great when the rest of the industry is expected to grow by 8.3%.
In light of this, it's somewhat alarming that Xinte Energy's P/S sits in line with the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the negative growth outlook.
The Final Word
Xinte Energy's plummeting stock price has brought its P/S back to a similar region as the rest of the 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 check of Xinte Energy's analyst forecasts revealed that its outlook for shrinking revenue isn't bringing down its P/S as much as we would have predicted. With this in mind, we don't feel the current P/S is justified as declining revenues are unlikely to support a more positive sentiment for long. If the declining revenues were to materialize in the form of a declining share price, shareholders will be feeling the pinch.
A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Xinte Energy with six simple checks.
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.
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.