What Guangdong Wenke Green Technology Corp.,Ltd.'s (SZSE:002775) 30% Share Price Gain Is Not Telling You

Guangdong Wenke Green Technology Corp.,Ltd. (SZSE:002775) shares have continued their recent momentum with a 30% gain in the last month alone. Taking a wider view, although not as strong as the last month, the full year gain of 14% is also fairly reasonable.

In spite of the firm bounce in price, there still wouldn't be many who think Guangdong Wenke Green TechnologyLtd's price-to-sales (or "P/S") ratio of 3.8x is worth a mention when the median P/S in China's Commercial Services industry is similar at about 3.4x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

See our latest analysis for Guangdong Wenke Green TechnologyLtd

What Does Guangdong Wenke Green TechnologyLtd's Recent Performance Look Like?

For example, consider that Guangdong Wenke Green TechnologyLtd's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is moderate because investors think the company might still do enough to be in line with the broader industry in the near future. If not, then existing shareholders may be a little 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 Guangdong Wenke Green TechnologyLtd will help you shine a light on its historical performance.

Do Revenue Forecasts Match The P/S Ratio?

Guangdong Wenke Green TechnologyLtd's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 37%. This means it has also seen a slide in revenue over the longer-term as revenue is down 67% in total over the last three years. 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 35% shows it's an unpleasant look.

With this in mind, we find it worrying that Guangdong Wenke Green TechnologyLtd's P/S exceeds that of its industry peers. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Key Takeaway

Its shares have lifted substantially and now Guangdong Wenke Green TechnologyLtd's P/S is back within range of the industry median. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We find it unexpected that Guangdong Wenke Green TechnologyLtd trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

It is also worth noting that we have found 2 warning signs for Guangdong Wenke Green TechnologyLtd that you need to take into consideration.

If you're unsure about the strength of Guangdong Wenke Green TechnologyLtd'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.