Shanghai Yanhua Smartech Group Co., Ltd.'s (SZSE:002178) 30% Dip Still Leaving Some Shareholders Feeling Restless Over Its P/SRatio

The Shanghai Yanhua Smartech Group Co., Ltd. (SZSE:002178) share price has softened a substantial 30% over the previous 30 days, handing back much of the gains the stock has made lately. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 11% in that time.

Even after such a large drop in price, given around half the companies in China's Construction industry have price-to-sales ratios (or "P/S") below 1.4x, you may still consider Shanghai Yanhua Smartech Group as a stock to avoid entirely with its 6.3x 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.

View our latest analysis for Shanghai Yanhua Smartech Group

What Does Shanghai Yanhua Smartech Group's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Shanghai Yanhua Smartech Group over the last year, which is not ideal at all. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

Is There Enough Revenue Growth Forecasted For Shanghai Yanhua Smartech Group?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Shanghai Yanhua Smartech Group's to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 13%. The last three years don't look nice either as the company has shrunk revenue by 22% in aggregate. 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 in mind, we find it worrying that Shanghai Yanhua Smartech Group's P/S exceeds that of its industry peers. 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 Key Takeaway

Even after such a strong price drop, Shanghai Yanhua Smartech Group's P/S still exceeds the industry median significantly. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of Shanghai Yanhua Smartech Group 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. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Shanghai Yanhua Smartech Group (of which 1 is concerning!) you should know about.

If you're unsure about the strength of Shanghai Yanhua Smartech Group'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.