WenYi Trinity Technology Co., Ltd's (SHSE:600520) Popularity With Investors Under Threat As Stock Sinks 29%

WenYi Trinity Technology Co., Ltd (SHSE:600520) shareholders that were waiting for something to happen have been dealt a blow with a 29% share price drop in the last month. Looking back over the past twelve months the stock has been a solid performer regardless, with a gain of 12%.

In spite of the heavy fall in price, you could still be forgiven for thinking WenYi Trinity Technology is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 7.8x, considering almost half the companies in China's Machinery industry have P/S ratios below 2.8x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for WenYi Trinity Technology

What Does WenYi Trinity Technology's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at WenYi Trinity Technology over the last year, which is not ideal at all. 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. 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 WenYi Trinity Technology's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For WenYi Trinity Technology?

WenYi Trinity Technology'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.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 26%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 22% overall rise in revenue. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 25% shows it's noticeably less attractive.

In light of this, it's alarming that WenYi Trinity Technology's P/S sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates 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.

The Bottom Line On WenYi Trinity Technology's P/S

WenYi Trinity Technology's shares may have suffered, but its P/S remains high. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

The fact that WenYi Trinity Technology currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

Plus, you should also learn about this 1 warning sign we've spotted with WenYi Trinity Technology.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.