There's No Escaping Shenzhen Silver Basis Technology Co., Ltd.'s (SZSE:002786) Muted Revenues

With a price-to-sales (or "P/S") ratio of 2x Shenzhen Silver Basis Technology Co., Ltd. (SZSE:002786) may be sending bullish signals at the moment, given that almost half of all the Machinery companies in China have P/S ratios greater than 3.1x and even P/S higher than 6x are not unusual. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Shenzhen Silver Basis Technology

What Does Shenzhen Silver Basis Technology's P/S Mean For Shareholders?

For instance, Shenzhen Silver Basis Technology's receding revenue in recent times would have to be some food for thought. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

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

Is There Any Revenue Growth Forecasted For Shenzhen Silver Basis Technology?

In order to justify its P/S ratio, Shenzhen Silver Basis Technology would need to produce sluggish growth that's trailing the industry.

Retrospectively, the last year delivered a frustrating 4.9% decrease to the company's top line. As a result, revenue from three years ago have also fallen 6.3% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 22% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we are not surprised that Shenzhen Silver Basis Technology is trading at a P/S lower than the industry. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Final Word

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Shenzhen Silver Basis Technology confirms that the company's shrinking revenue over the past medium-term is a key factor in its low price-to-sales ratio, given the industry is projected to grow. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

You should always think about risks. Case in point, we've spotted 2 warning signs for Shenzhen Silver Basis Technology you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.