EFORT Intelligent Equipment Co., Ltd.'s (SHSE:688165) 29% Share Price Plunge Could Signal Some Risk

EFORT Intelligent Equipment Co., Ltd. (SHSE:688165) shares have had a horrible month, losing 29% after a relatively good period beforehand. Of course, over the longer-term many would still wish they owned shares as the stock's price has soared 155% in the last twelve months.

Although its price has dipped substantially, given around half the companies in China's Machinery industry have price-to-sales ratios (or "P/S") below 3.4x, you may still consider EFORT Intelligent Equipment as a stock to avoid entirely with its 10.1x 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.

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See our latest analysis for EFORT Intelligent Equipment

How EFORT Intelligent Equipment Has Been Performing

As an illustration, revenue has deteriorated at EFORT Intelligent Equipment 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. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as steep as EFORT Intelligent Equipment's is when the company's growth is on track to outshine the industry decidedly.

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 28%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 19% 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 that to the industry, which is predicted to deliver 22% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this information, we find it concerning that EFORT Intelligent Equipment 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 EFORT Intelligent Equipment's P/S

A significant share price dive has done very little to deflate EFORT Intelligent Equipment's very lofty P/S. 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.

The fact that EFORT Intelligent Equipment 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. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

We don't want to rain on the parade too much, but we did also find 1 warning sign for EFORT Intelligent Equipment that you need to be mindful of.

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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.