Shenzhen Ruihe Construction Decoration Co., Ltd.'s (SZSE:002620) Price Is Right But Growth Is Lacking After Shares Rocket 32%

Shenzhen Ruihe Construction Decoration Co., Ltd. (SZSE:002620) shareholders have had their patience rewarded with a 32% share price jump in the last month. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 29% in the last twelve months.

Although its price has surged higher, Shenzhen Ruihe Construction Decoration's price-to-sales (or "P/S") ratio of 1x might still make it look like a strong buy right now compared to the wider Professional Services industry in China, where around half of the companies have P/S ratios above 3.2x and even P/S above 9x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.

Check out our latest analysis for Shenzhen Ruihe Construction Decoration

What Does Shenzhen Ruihe Construction Decoration's Recent Performance Look Like?

For instance, Shenzhen Ruihe Construction Decoration's receding revenue in recent times would have to be some food for thought. Perhaps the market believes the recent revenue performance isn't good enough to keep up the industry, causing the P/S ratio to suffer. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

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

Is There Any Revenue Growth Forecasted For Shenzhen Ruihe Construction Decoration?

There's an inherent assumption that a company should far underperform the industry for P/S ratios like Shenzhen Ruihe Construction Decoration's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 27% decrease to the company's top line. As a result, revenue from three years ago have also fallen 64% overall. 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 45% shows it's an unpleasant look.

With this in mind, we understand why Shenzhen Ruihe Construction Decoration's P/S is lower than most of its industry peers. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Final Word

Shares in Shenzhen Ruihe Construction Decoration have risen appreciably however, its P/S is still subdued. 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.

It's no surprise that Shenzhen Ruihe Construction Decoration maintains its low P/S off the back of its sliding revenue over the medium-term. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

You need to take note of risks, for example - Shenzhen Ruihe Construction Decoration has 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

If you're unsure about the strength of Shenzhen Ruihe Construction Decoration'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.