Revenues Not Telling The Story For China Water Industry Group Limited (HKG:1129) After Shares Rise 50%

China Water Industry Group Limited (HKG:1129) shareholders are no doubt pleased to see that the share price has bounced 50% in the last month, although it is still struggling to make up recently lost ground. The last 30 days bring the annual gain to a very sharp 64%.

Even after such a large jump in price, there still wouldn't be many who think China Water Industry Group's price-to-sales (or "P/S") ratio of 0.8x is worth a mention when the median P/S in Hong Kong's Water Utilities industry is similar at about 0.5x. 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.

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What Does China Water Industry Group's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at China Water Industry Group over the last year, which is not ideal at all. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

How Is China Water Industry Group's Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like China Water Industry Group's is when the company's growth is tracking the industry closely.

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 50%. The last three years don't look nice either as the company has shrunk revenue by 70% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 5.8% shows it's an unpleasant look.

With this information, we find it concerning that China Water Industry Group is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

The Final Word

China Water Industry Group's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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.

Our look at China Water Industry Group revealed its shrinking revenues over the medium-term haven't impacted the P/S as much as we anticipated, given the industry is set to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Plus, you should also learn about these 4 warning signs we've spotted with China Water Industry Group (including 3 which shouldn't be ignored).

If you're unsure about the strength of China Water Industry Group'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.