More Unpleasant Surprises Could Be In Store For Dongguan Chitwing Technology Co., Ltd.'s (SZSE:002855) Shares After Tumbling 30%

Dongguan Chitwing Technology Co., Ltd. (SZSE:002855) shareholders that were waiting for something to happen have been dealt a blow with a 30% share price drop in the last month. The good news is that in the last year, the stock has shone bright like a diamond, gaining 140%.

Although its price has dipped substantially, there still wouldn't be many who think Dongguan Chitwing Technology's price-to-sales (or "P/S") ratio of 2.8x is worth a mention when the median P/S in China's Machinery industry is similar at about 2.6x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Check out our latest analysis for Dongguan Chitwing Technology

How Dongguan Chitwing Technology Has Been Performing

For example, consider that Dongguan Chitwing Technology's financial performance has been poor lately as its revenue has been in decline. 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 you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

Although there are no analyst estimates available for Dongguan Chitwing 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 Dongguan Chitwing Technology's Revenue Growth Trending?

Dongguan Chitwing Technology's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 31%. The last three years don't look nice either as the company has shrunk revenue by 25% in aggregate. 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 24% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that Dongguan Chitwing Technology is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. 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.

What Does Dongguan Chitwing Technology's P/S Mean For Investors?

Following Dongguan Chitwing Technology's share price tumble, its P/S is just clinging on to the industry median P/S. 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.

The fact that Dongguan Chitwing Technology currently trades at a P/S on par with the rest of the industry is surprising to us since its recent revenues have been in decline over the medium-term, all while the industry is set to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Dongguan Chitwing Technology that you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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.