Some Shenzhen Magic Design & Decoration Engineering Co., Ltd. (SZSE:002856) Shareholders Look For Exit As Shares Take 27% Pounding

Unfortunately for some shareholders, the Shenzhen Magic Design & Decoration Engineering Co., Ltd. (SZSE:002856) share price has dived 27% in the last thirty days, prolonging recent pain. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 28% in that time.

Even after such a large drop in price, you could still be forgiven for feeling indifferent about Shenzhen Magic Design & Decoration Engineering's P/S ratio of 0.8x, since the median price-to-sales (or "P/S") ratio for the Construction industry in China is also close to 1.1x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

See our latest analysis for Shenzhen Magic Design & Decoration Engineering

How Has Shenzhen Magic Design & Decoration Engineering Performed Recently?

As an illustration, revenue has deteriorated at Shenzhen Magic Design & Decoration Engineering over the last year, which is not ideal at all. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. 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.

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.

Retrospectively, the last year delivered a frustrating 4.5% decrease to the company's top line. Regardless, revenue has managed to lift by a handy 7.9% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

This is in contrast to the rest of the industry, which is expected to grow by 14% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in mind, we find it intriguing that Shenzhen Magic Design & Decoration Engineering's P/S is comparable to that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Key Takeaway

With its share price dropping off a cliff, the P/S for Shenzhen Magic Design & Decoration Engineering looks to be in line with the rest of the Construction industry. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Shenzhen Magic Design & Decoration Engineering revealed its poor three-year revenue trends aren't resulting in a lower P/S as per our expectations, given they look worse than current industry outlook. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Shenzhen Magic Design & Decoration Engineering (1 can't be ignored) 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.