Optimistic Investors Push Shenzhen Strongteam Decoration Engineering Co., Ltd. (SZSE:002989) Shares Up 30% But Growth Is Lacking

Shenzhen Strongteam Decoration Engineering Co., Ltd. (SZSE:002989) shareholders would be excited to see that the share price has had a great month, posting a 30% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 28%.

After such a large jump in price, you could be forgiven for thinking Shenzhen Strongteam Decoration Engineering is a stock not worth researching with a price-to-sales ratios (or "P/S") of 4.2x, considering almost half the companies in China's Commercial Services industry have P/S ratios below 2.5x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Shenzhen Strongteam Decoration Engineering

What Does Shenzhen Strongteam Decoration Engineering's Recent Performance Look Like?

For example, consider that Shenzhen Strongteam Decoration Engineering's financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. If not, then existing shareholders may be quite nervous about the viability of the share price.

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

How Is Shenzhen Strongteam Decoration Engineering's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as high as Shenzhen Strongteam Decoration Engineering's is when the company's growth is on track to outshine the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 59%. As a result, revenue from three years ago have also fallen 68% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 29% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's alarming that Shenzhen Strongteam Decoration Engineering's P/S sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very 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.

What Does Shenzhen Strongteam Decoration Engineering's P/S Mean For Investors?

Shenzhen Strongteam Decoration Engineering shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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've established that Shenzhen Strongteam Decoration Engineering currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

Having said that, be aware Shenzhen Strongteam Decoration Engineering is showing 5 warning signs in our investment analysis, and 2 of those are potentially serious.

If you're unsure about the strength of Shenzhen Strongteam Decoration Engineering'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.