Nanjing Wondux Environmental Protection Technology Corp., Ltd. (SHSE:688178) Shares Fly 25% But Investors Aren't Buying For Growth

Nanjing Wondux Environmental Protection Technology Corp., Ltd. (SHSE:688178) shareholders would be excited to see that the share price has had a great month, posting a 25% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 40% in the last year.

In spite of the firm bounce in price, Nanjing Wondux Environmental Protection Technology's price-to-sales (or "P/S") ratio of 2.1x might still make it look like a buy right now compared to the Commercial Services industry in China, where around half of the companies have P/S ratios above 3.4x and even P/S above 6x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

Check out our latest analysis for Nanjing Wondux Environmental Protection Technology

How Nanjing Wondux Environmental Protection Technology Has Been Performing

As an illustration, revenue has deteriorated at Nanjing Wondux Environmental Protection Technology over the last year, which is not ideal at all. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of 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 Nanjing Wondux Environmental Protection Technology's earnings, revenue and cash flow.

How Is Nanjing Wondux Environmental Protection Technology's Revenue Growth Trending?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Nanjing Wondux Environmental Protection Technology's to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 30%. The last three years don't look nice either as the company has shrunk revenue by 38% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 32% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we are not surprised that Nanjing Wondux Environmental Protection Technology is trading at a P/S lower than the industry. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

The Key Takeaway

The latest share price surge wasn't enough to lift Nanjing Wondux Environmental Protection Technology's P/S close to the industry median. 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 Nanjing Wondux Environmental Protection Technology confirms that the company's shrinking revenue over the past medium-term is a key factor in its low price-to-sales ratio, given the industry is projected to grow. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Given the current circumstances, it seems unlikely that the share price will experience any significant movement in either direction in the near future if recent medium-term revenue trends persist.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Nanjing Wondux Environmental Protection Technology that you need to be mindful of.

If you're unsure about the strength of Nanjing Wondux Environmental Protection Technology's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.