Zhejiang Fenglong Electric Co., Ltd.'s (SZSE:002931) 25% Share Price Plunge Could Signal Some Risk

Unfortunately for some shareholders, the Zhejiang Fenglong Electric Co., Ltd. (SZSE:002931) share price has dived 25% in the last thirty days, prolonging recent pain. Longer-term shareholders would now have taken a real hit with the stock declining 2.7% in the last year.

Although its price has dipped substantially, when almost half of the companies in China's Machinery industry have price-to-sales ratios (or "P/S") below 2.5x, you may still consider Zhejiang Fenglong Electric as a stock not worth researching with its 4.9x 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 so lofty.

Check out our latest analysis for Zhejiang Fenglong Electric

How Has Zhejiang Fenglong Electric Performed Recently?

As an illustration, revenue has deteriorated at Zhejiang Fenglong Electric over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

Although there are no analyst estimates available for Zhejiang Fenglong Electric, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Zhejiang Fenglong Electric's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Zhejiang Fenglong Electric's is when the company's growth is on track to outshine the industry decidedly.

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 19%. As a result, revenue from three years ago have also fallen 31% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 24% shows it's an unpleasant look.

With this information, we find it concerning that Zhejiang Fenglong Electric is trading at a P/S higher than the industry. 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 heavily on the share price eventually.

The Final Word

Even after such a strong price drop, Zhejiang Fenglong Electric's P/S still exceeds the industry median significantly. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our examination of Zhejiang Fenglong Electric revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You need to take note of risks, for example - Zhejiang Fenglong Electric has 2 warning signs (and 1 which is a bit concerning) we think you should know about.

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.