Qingdao Zhongzi Zhongcheng Group Co.,Ltd. (SZSE:300208) Shares May Have Slumped 31% But Getting In Cheap Is Still Unlikely

Unfortunately for some shareholders, the Qingdao Zhongzi Zhongcheng Group Co.,Ltd. (SZSE:300208) share price has dived 31% in the last thirty days, prolonging recent pain. For any long-term shareholders, the last month ends a year to forget by locking in a 75% share price decline.

Although its price has dipped substantially, given close to half the companies operating in China's Electrical industry have price-to-sales ratios (or "P/S") below 2.2x, you may still consider Qingdao Zhongzi Zhongcheng GroupLtd as a stock to potentially avoid with its 3.6x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Qingdao Zhongzi Zhongcheng GroupLtd

How Qingdao Zhongzi Zhongcheng GroupLtd Has Been Performing

For example, consider that Qingdao Zhongzi Zhongcheng GroupLtd's financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. If not, then existing shareholders may be quite nervous about the viability of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Qingdao Zhongzi Zhongcheng GroupLtd will help you shine a light on its historical performance.

How Is Qingdao Zhongzi Zhongcheng GroupLtd's Revenue Growth Trending?

In order to justify its P/S ratio, Qingdao Zhongzi Zhongcheng GroupLtd would need to produce impressive growth in excess of 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 45%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 59% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 24% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that Qingdao Zhongzi Zhongcheng GroupLtd's P/S sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates 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.

What We Can Learn From Qingdao Zhongzi Zhongcheng GroupLtd's P/S?

There's still some elevation in Qingdao Zhongzi Zhongcheng GroupLtd's P/S, even if the same can't be said for its share price recently. 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.

Our examination of Qingdao Zhongzi Zhongcheng GroupLtd revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with Qingdao Zhongzi Zhongcheng GroupLtd, and understanding these should be part of your investment process.

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.

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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.