What Wuhan Nusun Landscape Co., Ltd.'s (SZSE:300536) 34% Share Price Gain Is Not Telling You

Wuhan Nusun Landscape Co., Ltd. (SZSE:300536) shareholders would be excited to see that the share price has had a great month, posting a 34% gain and recovering from prior weakness. But the last month did very little to improve the 53% share price decline over the last year.

Since its price has surged higher, you could be forgiven for thinking Wuhan Nusun Landscape is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 23.9x, considering almost half the companies in China's Commercial Services industry have P/S ratios below 3.2x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for Wuhan Nusun Landscape

What Does Wuhan Nusun Landscape's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Wuhan Nusun Landscape over the last year, which is not ideal at all. 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. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Wuhan Nusun Landscape will help you shine a light on its historical performance.

How Is Wuhan Nusun Landscape's Revenue Growth Trending?

In order to justify its P/S ratio, Wuhan Nusun Landscape would need to produce outstanding growth that's well in excess of the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 39%. As a result, revenue from three years ago have also fallen 72% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 36% shows it's an unpleasant look.

In light of this, it's alarming that Wuhan Nusun Landscape'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 Key Takeaway

Shares in Wuhan Nusun Landscape have seen a strong upwards swing lately, which has really helped boost its P/S figure. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Wuhan Nusun Landscape currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. 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.

Plus, you should also learn about these 2 warning signs we've spotted with Wuhan Nusun Landscape.

If you're unsure about the strength of Wuhan Nusun Landscape'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.