Shenzhen Magic Design & Decoration Engineering Co., Ltd.'s (SZSE:002856) 25% Share Price Plunge Could Signal Some Risk

Shenzhen Magic Design & Decoration Engineering Co., Ltd. (SZSE:002856) shares have had a horrible month, losing 25% after a relatively good period beforehand. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 43% in that time.

Even after such a large drop in price, it's still not a stretch to say that Shenzhen Magic Design & Decoration Engineering's price-to-sales (or "P/S") ratio of 1.4x right now seems quite "middle-of-the-road" compared to the Construction industry in China, seeing as it matches the P/S ratio of the wider industry. 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.

View our latest analysis for Shenzhen Magic Design & Decoration Engineering

How Shenzhen Magic Design & Decoration Engineering Has Been Performing

For example, consider that Shenzhen Magic Design & Decoration Engineering's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is moderate because investors think the company might still do enough to be in line with the broader industry in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

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 Magic Design & Decoration Engineering's earnings, revenue and cash flow.

Is There Some Revenue Growth Forecasted For Shenzhen Magic Design & Decoration Engineering?

In order to justify its P/S ratio, Shenzhen Magic Design & Decoration Engineering would need to produce growth that's similar to the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 33%. The last three years don't look nice either as the company has shrunk revenue by 20% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 12% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's somewhat alarming that Shenzhen Magic Design & Decoration Engineering's P/S sits in line with the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

What Does Shenzhen Magic Design & Decoration Engineering's P/S Mean For Investors?

Following Shenzhen Magic Design & Decoration Engineering's share price tumble, its P/S is just clinging on to the industry median P/S. 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.

We find it unexpected that Shenzhen Magic Design & Decoration Engineering trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Shenzhen Magic Design & Decoration Engineering (of which 2 shouldn't be ignored!) you should know about.

If these risks are making you reconsider your opinion on Shenzhen Magic Design & Decoration Engineering, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.