Revenues Not Telling The Story For Guangdong Mingzhu Group Co.,Ltd (SHSE:600382) After Shares Rise 29%

Despite an already strong run, Guangdong Mingzhu Group Co.,Ltd (SHSE:600382) shares have been powering on, with a gain of 29% in the last thirty days. Taking a wider view, although not as strong as the last month, the full year gain of 12% is also fairly reasonable.

Since its price has surged higher, when almost half of the companies in China's Trade Distributors industry have price-to-sales ratios (or "P/S") below 0.9x, you may consider Guangdong Mingzhu GroupLtd as a stock not worth researching with its 7.7x 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 Guangdong Mingzhu GroupLtd

What Does Guangdong Mingzhu GroupLtd's Recent Performance Look Like?

For example, consider that Guangdong Mingzhu GroupLtd's financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. If not, then existing shareholders may be quite nervous about the viability of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Guangdong Mingzhu GroupLtd will help you shine a light on its historical performance.

Do Revenue Forecasts Match The High P/S Ratio?

Guangdong Mingzhu GroupLtd's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 37%. As a result, revenue from three years ago have also fallen 84% overall. 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 14% shows it's an unpleasant look.

With this information, we find it concerning that Guangdong Mingzhu GroupLtd is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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 Final Word

Shares in Guangdong Mingzhu GroupLtd 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 Guangdong Mingzhu GroupLtd 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. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. 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.

Plus, you should also learn about these 2 warning signs we've spotted with Guangdong Mingzhu GroupLtd.

If you're unsure about the strength of Guangdong Mingzhu GroupLtd'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.