What Shanghai CDXJ Digital Technology Co.,LTD's (SHSE:603887) 31% Share Price Gain Is Not Telling You

Despite an already strong run, Shanghai CDXJ Digital Technology Co.,LTD (SHSE:603887) shares have been powering on, with a gain of 31% in the last thirty days. The annual gain comes to 251% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, when almost half of the companies in China's Construction industry have price-to-sales ratios (or "P/S") below 1.5x, you may consider Shanghai CDXJ Digital TechnologyLTD as a stock not worth researching with its 5.9x 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.

Check out our latest analysis for Shanghai CDXJ Digital TechnologyLTD

What Does Shanghai CDXJ Digital TechnologyLTD's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Shanghai CDXJ Digital TechnologyLTD 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. 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 Shanghai CDXJ Digital TechnologyLTD, 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?

Shanghai CDXJ Digital TechnologyLTD'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 15%. As a result, revenue from three years ago have also fallen 38% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 12% shows it's an unpleasant look.

With this information, we find it concerning that Shanghai CDXJ Digital TechnologyLTD is trading at a P/S higher than the industry. 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 Bottom Line On Shanghai CDXJ Digital TechnologyLTD's P/S

Shares in Shanghai CDXJ Digital TechnologyLTD 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 Shanghai CDXJ Digital 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. 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.

Plus, you should also learn about these 3 warning signs we've spotted with Shanghai CDXJ Digital TechnologyLTD.

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.