C&D Newin Paper & Pulp Corporation Limited (HKG:731) Not Doing Enough For Some Investors As Its Shares Slump 37%

The C&D Newin Paper & Pulp Corporation Limited (HKG:731) share price has fared very poorly over the last month, falling by a substantial 37%. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 44% in that time.

Although its price has dipped substantially, considering around half the companies operating in Hong Kong's Trade Distributors industry have price-to-sales ratios (or "P/S") above 0.7x, you may still consider C&D Newin Paper & Pulp as an solid investment opportunity with its 0.1x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

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View our latest analysis for C&D Newin Paper & Pulp

What Does C&D Newin Paper & Pulp's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at C&D Newin Paper & Pulp over the last year, which is not ideal at all. 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. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Is There Any Revenue Growth Forecasted For C&D Newin Paper & Pulp?

The only time you'd be truly comfortable seeing a P/S as low as C&D Newin Paper & Pulp's is when the company's growth is on track to lag the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 9.4%. This means it has also seen a slide in revenue over the longer-term as revenue is down 10% 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.

Comparing that to the industry, which is predicted to deliver 24% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we understand why C&D Newin Paper & Pulp's P/S is lower than most of its industry peers. 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 Key Takeaway

C&D Newin Paper & Pulp's recently weak share price has pulled its P/S back below other Trade Distributors companies. 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.

As we suspected, our examination of C&D Newin Paper & Pulp 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. 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.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for C&D Newin Paper & Pulp (1 is significant) you should be aware of.

If you're unsure about the strength of C&D Newin Paper & Pulp's 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.