More Unpleasant Surprises Could Be In Store For Shenzhen Xinyuren Technology Co., Ltd.'s (SHSE:688573) Shares After Tumbling 25%

Shenzhen Xinyuren Technology Co., Ltd. (SHSE:688573) shareholders won't be pleased to see that the share price has had a very rough month, dropping 25% and undoing the prior period's positive performance. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 48% in that time.

Even after such a large drop in price, it's still not a stretch to say that Shenzhen Xinyuren Technology's price-to-sales (or "P/S") ratio of 3x right now seems quite "middle-of-the-road" compared to the Machinery industry in China, where the median P/S ratio is around 2.8x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for Shenzhen Xinyuren Technology

How Has Shenzhen Xinyuren Technology Performed Recently?

For instance, Shenzhen Xinyuren Technology's receding revenue in recent times would have to be some food for thought. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

Although there are no analyst estimates available for Shenzhen Xinyuren Technology, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Shenzhen Xinyuren Technology's Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like Shenzhen Xinyuren Technology's is when the company's growth is tracking the industry closely.

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 38%. This means it has also seen a slide in revenue over the longer-term as revenue is down 12% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 22% shows it's an unpleasant look.

With this in mind, we find it worrying that Shenzhen Xinyuren Technology's P/S exceeds that of its industry peers. 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 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

With its share price dropping off a cliff, the P/S for Shenzhen Xinyuren Technology looks to be in line with the rest of the Machinery industry. 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.

We find it unexpected that Shenzhen Xinyuren Technology trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Plus, you should also learn about these 2 warning signs we've spotted with Shenzhen Xinyuren Technology (including 1 which is a bit unpleasant).

If you're unsure about the strength of Shenzhen Xinyuren Technology'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.