Risks To Shareholder Returns Are Elevated At These Prices For ShenZhen RoadRover Technology Co.,Ltd (SZSE:002813)

When you see that almost half of the companies in the Auto Components industry in China have price-to-sales ratios (or "P/S") below 2.7x, ShenZhen RoadRover Technology Co.,Ltd (SZSE:002813) looks to be giving off strong sell signals with its 10.6x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for ShenZhen RoadRover TechnologyLtd

How Has ShenZhen RoadRover TechnologyLtd Performed Recently?

For instance, ShenZhen RoadRover TechnologyLtd's receding revenue in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

How Is ShenZhen RoadRover TechnologyLtd's Revenue Growth Trending?

In order to justify its P/S ratio, ShenZhen RoadRover TechnologyLtd would need to produce outstanding growth that's well in excess of the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 13%. The last three years don't look nice either as the company has shrunk revenue by 22% in aggregate. 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 25% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's alarming that ShenZhen RoadRover TechnologyLtd's P/S sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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.

What We Can Learn From ShenZhen RoadRover TechnologyLtd's P/S?

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our examination of ShenZhen RoadRover TechnologyLtd 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. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for ShenZhen RoadRover TechnologyLtd with six simple checks on some of these key factors.

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

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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.