Shenzhen Tongyi Industry Co., Ltd.'s (SZSE:300538) Price Is Out Of Tune With Revenues

With a median price-to-sales (or "P/S") ratio of close to 0.7x in the Trade Distributors industry in China, you could be forgiven for feeling indifferent about Shenzhen Tongyi Industry Co., Ltd.'s (SZSE:300538) P/S ratio of 0.9x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for Shenzhen Tongyi Industry

What Does Shenzhen Tongyi Industry's Recent Performance Look Like?

Shenzhen Tongyi Industry has been doing a good job lately as it's been growing revenue at a solid pace. It might be that many expect the respectable revenue performance to wane, which has kept the P/S from rising. If that doesn't eventuate, then existing shareholders probably aren't too pessimistic about the future direction of the share price.

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

What Are Revenue Growth Metrics Telling Us About The P/S?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Shenzhen Tongyi Industry's to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 27%. Pleasingly, revenue has also lifted 43% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 17% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this information, we find it interesting that Shenzhen Tongyi Industry is trading at a fairly similar P/S compared to the industry. 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

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.

Our examination of Shenzhen Tongyi Industry 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. If recent medium-term revenue trends continue, the probability of a share price decline will become quite substantial, placing shareholders at risk.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Shenzhen Tongyi Industry, 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.