Nanjing Canatal Data-Centre Environmental Tech Co., Ltd's (SHSE:603912) Business Is Trailing The Industry But Its Shares Aren't

When you see that almost half of the companies in the Machinery industry in China have price-to-sales ratios (or "P/S") below 2.3x, Nanjing Canatal Data-Centre Environmental Tech Co., Ltd (SHSE:603912) looks to be giving off strong sell signals with its 5.5x 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.

Check out our latest analysis for Nanjing Canatal Data-Centre Environmental Tech

What Does Nanjing Canatal Data-Centre Environmental Tech's Recent Performance Look Like?

Nanjing Canatal Data-Centre Environmental Tech has been doing a decent job lately as it's been growing revenue at a reasonable pace. It might be that many expect the reasonable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. 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 Nanjing Canatal Data-Centre Environmental Tech, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

What Are Revenue Growth Metrics Telling Us About The High P/S?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Nanjing Canatal Data-Centre Environmental Tech's to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 4.0% last year. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 6.5% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 22% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's alarming that Nanjing Canatal Data-Centre Environmental Tech'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. 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

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Nanjing Canatal Data-Centre Environmental Tech 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. 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 Nanjing Canatal Data-Centre Environmental Tech (including 2 which are a bit unpleasant).

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.

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