There's No Escaping Shenzhen Zhongzhuang Construction Group Co.,Ltd's (SZSE:002822) Muted Revenues Despite A 31% Share Price Rise

Shenzhen Zhongzhuang Construction Group Co.,Ltd (SZSE:002822) shareholders are no doubt pleased to see that the share price has bounced 31% in the last month, although it is still struggling to make up recently lost ground. But the last month did very little to improve the 67% share price decline over the last year.

Although its price has surged higher, considering around half the companies operating in China's Construction industry have price-to-sales ratios (or "P/S") above 0.9x, you may still consider Shenzhen Zhongzhuang Construction GroupLtd as an solid investment opportunity with its 0.3x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

Check out our latest analysis for Shenzhen Zhongzhuang Construction GroupLtd

How Shenzhen Zhongzhuang Construction GroupLtd Has Been Performing

For example, consider that Shenzhen Zhongzhuang Construction GroupLtd's financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the recent revenue performance isn't good enough to keep up the industry, causing the P/S ratio to suffer. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Shenzhen Zhongzhuang Construction GroupLtd's earnings, revenue and cash flow.

How Is Shenzhen Zhongzhuang Construction GroupLtd's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as low as Shenzhen Zhongzhuang Construction GroupLtd's is when the company's growth is on track to lag the industry.

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%. As a result, revenue from three years ago have also fallen 40% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 13% shows it's an unpleasant look.

With this in mind, we understand why Shenzhen Zhongzhuang Construction GroupLtd's P/S is lower than most of its industry peers. 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. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

The Final Word

The latest share price surge wasn't enough to lift Shenzhen Zhongzhuang Construction GroupLtd's P/S close to the industry median. 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.

It's no surprise that Shenzhen Zhongzhuang Construction GroupLtd maintains its low P/S off the back of its sliding revenue over the medium-term. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Given the current circumstances, it seems unlikely that the share price will experience any significant movement in either direction in the near future if recent medium-term revenue trends persist.

Before you take the next step, you should know about the 3 warning signs for Shenzhen Zhongzhuang Construction GroupLtd that we have uncovered.

If you're unsure about the strength of Shenzhen Zhongzhuang Construction GroupLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com