Huabao International Holdings Limited (HKG:336) shares have retraced a considerable 26% in the last month, reversing a fair amount of their solid recent performance. To make matters worse, the recent drop has wiped out a year's worth of gains with the share price now back where it started a year ago.

In spite of the heavy fall in price, given close to half the companies operating in Hong Kong's Chemicals industry have price-to-sales ratios (or "P/S") below 0.4x, you may still consider Huabao International Holdings as a stock to potentially avoid with its 2.1x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

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View our latest analysis for Huabao International Holdings

What Does Huabao International Holdings' P/S Mean For Shareholders?

We'd have to say that with no tangible growth over the last year, Huabao International Holdings' revenue has been unimpressive. It might be that many are expecting an improvement to the uninspiring revenue performance over the coming period, which has kept the P/S from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.

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 Huabao International Holdings' earnings, revenue and cash flow.

How Is Huabao International Holdings' Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as high as Huabao International Holdings' is when the company's growth is on track to outshine the industry.

Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. The lack of growth did nothing to help the company's aggregate three-year performance, which is an unsavory 13% drop in revenue. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 2.5% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that Huabao International Holdings is trading at a P/S higher than the industry. 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. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What We Can Learn From Huabao International Holdings' P/S?

There's still some elevation in Huabao International Holdings' P/S, even if the same can't be said for its share price recently. 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 examination of Huabao International 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. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you settle on your opinion, we've discovered 2 warning signs for Huabao International Holdings (1 is a bit concerning!) that you should be aware of.

If you're unsure about the strength of Huabao International 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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