Subdued Growth No Barrier To Shenzhen Strongteam Decoration Engineering Co., Ltd. (SZSE:002989) With Shares Advancing 32%

The Shenzhen Strongteam Decoration Engineering Co., Ltd. (SZSE:002989) share price has done very well over the last month, posting an excellent gain of 32%. Looking back a bit further, it's encouraging to see the stock is up 38% in the last year.

Since its price has surged higher, you could be forgiven for thinking Shenzhen Strongteam Decoration Engineering is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 6.8x, considering almost half the companies in China's Commercial Services industry have P/S ratios below 2.3x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for Shenzhen Strongteam Decoration Engineering

How Shenzhen Strongteam Decoration Engineering Has Been Performing

For instance, Shenzhen Strongteam Decoration Engineering's receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

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 steep as Shenzhen Strongteam Decoration Engineering's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered a frustrating 66% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 79% 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 29% shows it's an unpleasant look.

In light of this, it's alarming that Shenzhen Strongteam Decoration Engineering's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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.

The Final Word

The strong share price surge has lead to Shenzhen Strongteam Decoration Engineering's P/S soaring as well. 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.

Our examination of Shenzhen Strongteam Decoration Engineering revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. 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. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Shenzhen Strongteam Decoration Engineering (1 makes us a bit uncomfortable!) that you need to be mindful of.

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.