Shandong Molong Petroleum Machinery Company Limited's (HKG:568) 27% Share Price Plunge Could Signal Some Risk

The Shandong Molong Petroleum Machinery Company Limited (HKG:568) share price has fared very poorly over the last month, falling by a substantial 27%. The good news is that in the last year, the stock has shone bright like a diamond, gaining 151%.

Although its price has dipped substantially, given close to half the companies operating in Hong Kong's Energy Services industry have price-to-sales ratios (or "P/S") below 0.4x, you may still consider Shandong Molong Petroleum Machinery as a stock to potentially avoid with its 1.4x 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 as high as it is.

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View our latest analysis for Shandong Molong Petroleum Machinery

What Does Shandong Molong Petroleum Machinery's Recent Performance Look Like?

The revenue growth achieved at Shandong Molong Petroleum Machinery over the last year would be more than acceptable for most companies. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders may be a little 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 Shandong Molong Petroleum Machinery's earnings, revenue and cash flow.

What Are Revenue Growth Metrics Telling Us About The High P/S?

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

Retrospectively, the last year delivered an exceptional 17% gain to the company's top line. However, this wasn't enough as the latest three year period has seen the company endure a nasty 49% drop in revenue in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 7.7% 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 find it worrying that Shandong Molong Petroleum Machinery's 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

Despite the recent share price weakness, Shandong Molong Petroleum Machinery's P/S remains higher than most other companies in the industry. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Shandong Molong Petroleum Machinery currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

You always need to take note of risks, for example - Shandong Molong Petroleum Machinery has 1 warning sign we think you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.