Some Zhejiang Jindun Fans Co., Ltd (SZSE:300411) Shareholders Look For Exit As Shares Take 26% Pounding

Zhejiang Jindun Fans Co., Ltd (SZSE:300411) shares have retraced a considerable 26% in the last month, reversing a fair amount of their solid recent performance. Looking at the bigger picture, even after this poor month the stock is up 93% in the last year.

In spite of the heavy fall in price, you could still be forgiven for thinking Zhejiang Jindun Fans is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 10x, considering almost half the companies in China's Machinery industry have P/S ratios below 2.5x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Zhejiang Jindun Fans

How Zhejiang Jindun Fans Has Been Performing

The revenue growth achieved at Zhejiang Jindun Fans over the last year would be more than acceptable for most companies. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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 Zhejiang Jindun Fans' earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

Zhejiang Jindun Fans' P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Taking a look back first, we see that the company grew revenue by an impressive 18% last year. Still, revenue has fallen 26% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

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 Jindun Fans is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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 Bottom Line On Zhejiang Jindun Fans' P/S

Even after such a strong price drop, Zhejiang Jindun Fans' P/S still exceeds the industry median significantly. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Zhejiang Jindun Fans currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Zhejiang Jindun Fans (at least 1 which makes us a bit uncomfortable), and understanding them should be part of your investment process.

If you're unsure about the strength of Zhejiang Jindun Fans' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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.