China Nature Energy Technology Holdings Limited’s (HKG:1597) price-to-sales (or “P/S”) ratio of 4x may look like a poor investment opportunity when you consider close to half the companies in the Electrical industry in Hong Kong have P/S ratios below 0.6x. Although, it’s not wise to just take the P/S at face value as there may be an explanation why it’s so lofty.

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See our latest analysis for China Nature Energy Technology Holdings

What Does China Nature Energy Technology Holdings’ Recent Performance Look Like?

For example, consider that China Nature Energy Technology Holdings’ financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

We don’t have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on China Nature Energy Technology Holdings’ earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For China Nature Energy Technology Holdings?

The only time you’d be truly comfortable seeing a P/S as steep as China Nature Energy Technology Holdings’ is when the company’s growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered a frustrating 30% decrease to the company’s top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 49% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry’s one-year forecast for expansion of 18% shows it’s an unpleasant look.

With this in mind, we find it worrying that China Nature Energy Technology Holdings’ P/S exceeds that of its industry peers. Apparently many investors in the company are way more bullish than recent times would indicate and aren’t willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Final Word

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our examination of China Nature Energy Technology Holdings revealed its shrinking revenue over the medium-term isn’t resulting in a P/S as low as we expected, given the industry is set to grow. Right now we aren’t comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. 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.

You need to take note of risks, for example – China Nature Energy Technology Holdings has 3 warning signs (and 2 which don’t sit too well with us) we think you should know about.

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.