Why Investors Shouldn't Be Surprised By China Environmental Technology and Bioenergy Holdings Limited's (HKG:1237) 28% Share Price Plunge

China Environmental Technology and Bioenergy Holdings Limited (HKG:1237) shareholders won't be pleased to see that the share price has had a very rough month, dropping 28% and undoing the prior period's positive performance. The good news is that in the last year, the stock has shone bright like a diamond, gaining 159%.

After such a large drop in price, given about half the companies operating in Hong Kong's Leisure industry have price-to-sales ratios (or "P/S") above 0.7x, you may consider China Environmental Technology and Bioenergy Holdings as an attractive investment with its 0.2x P/S ratio. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

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View our latest analysis for China Environmental Technology and Bioenergy Holdings

What Does China Environmental Technology and Bioenergy Holdings' Recent Performance Look Like?

Recent times have been quite advantageous for China Environmental Technology and Bioenergy Holdings as its revenue has been rising very briskly. Perhaps the market is expecting future revenue performance to dwindle, which has kept the P/S suppressed. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Although there are no analyst estimates available for China Environmental Technology and Bioenergy Holdings, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is China Environmental Technology and Bioenergy Holdings' Revenue Growth Trending?

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.

If we review the last year of revenue growth, the company posted a terrific increase of 39%. Still, revenue has fallen 36% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 11% shows it's an unpleasant look.

With this information, we are not surprised that China Environmental Technology and Bioenergy Holdings is trading at a P/S lower than the industry. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

What Does China Environmental Technology and Bioenergy Holdings' P/S Mean For Investors?

China Environmental Technology and Bioenergy Holdings' P/S has taken a dip along with its share price. 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.

As we suspected, our examination of China Environmental Technology and Bioenergy Holdings revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. Given the current circumstances, it seems unlikely that the share price will experience any significant movement in either direction in the near future if recent medium-term revenue trends persist.

We don't want to rain on the parade too much, but we did also find 2 warning signs for China Environmental Technology and Bioenergy Holdings that you need to be mindful of.

If you're unsure about the strength of China Environmental Technology and Bioenergy Holdings' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.