Some Confidence Is Lacking In Zoje Resources Investment Co., Ltd. (SZSE:002021) As Shares Slide 26%

The Zoje Resources Investment Co., Ltd. (SZSE:002021) share price has softened a substantial 26% over the previous 30 days, handing back much of the gains the stock has made lately. Looking at the bigger picture, even after this poor month the stock is up 52% in the last year.

Even after such a large drop in price, you could still be forgiven for feeling indifferent about Zoje Resources Investment's P/S ratio of 2.7x, since the median price-to-sales (or "P/S") ratio for the Machinery industry in China is also close to 2.8x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for Zoje Resources Investment

What Does Zoje Resources Investment's Recent Performance Look Like?

For example, consider that Zoje Resources Investment's financial performance has been poor lately as its revenue has been in decline. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. 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 Zoje Resources Investment, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Zoje Resources Investment's Revenue Growth Trending?

In order to justify its P/S ratio, Zoje Resources Investment would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a frustrating 16% decrease to the company's top line. Still, the latest three year period has seen an excellent 45% overall rise in revenue, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 28% shows it's noticeably less attractive.

In light of this, it's curious that Zoje Resources Investment's P/S sits in line with the majority of other companies. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

The Key Takeaway

Zoje Resources Investment's plummeting stock price has brought its P/S back to a similar region as the rest of the 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.

Our examination of Zoje Resources Investment revealed its poor three-year revenue trends aren't resulting in a lower P/S as per our expectations, given they look worse than current industry outlook. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Plus, you should also learn about these 3 warning signs we've spotted with Zoje Resources Investment.

If you're unsure about the strength of Zoje Resources Investment'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.