Zotye Automobile Co., Ltd (SZSE:000980) Stock Rockets 34% As Investors Are Less Pessimistic Than Expected

The Zotye Automobile Co., Ltd (SZSE:000980) share price has done very well over the last month, posting an excellent gain of 34%. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 40% in the last twelve months.

After such a large jump in price, given around half the companies in China's Auto industry have price-to-sales ratios (or "P/S") below 1.7x, you may consider Zotye Automobile as a stock to avoid entirely with its 16.3x 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 so lofty.

See our latest analysis for Zotye Automobile

What Does Zotye Automobile's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Zotye Automobile over the last year, which is not ideal at all. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

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

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as steep as Zotye Automobile's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered a frustrating 29% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 36% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 40% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Zotye Automobile'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. 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.

The Key Takeaway

Shares in Zotye Automobile have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

Our examination of Zotye Automobile 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.

It is also worth noting that we have found 1 warning sign for Zotye Automobile that you need to take into consideration.

If these risks are making you reconsider your opinion on Zotye Automobile, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.