Shenzhen Institute of Building Research Co., Ltd. (SZSE:300675) Shares May Have Slumped 26% But Getting In Cheap Is Still Unlikely

Shenzhen Institute of Building Research Co., Ltd. (SZSE:300675) shareholders that were waiting for something to happen have been dealt a blow with a 26% share price drop in the last month. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 29% share price drop.

Even after such a large drop in price, you could still be forgiven for thinking Shenzhen Institute of Building Research is a stock not worth researching with a price-to-sales ratios (or "P/S") of 3.8x, considering almost half the companies in China's Professional Services industry have P/S ratios below 2.7x. 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 Institute of Building Research

What Does Shenzhen Institute of Building Research's P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, Shenzhen Institute of Building Research's revenue has gone into reverse gear, which is not great. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on analyst estimates for the company? Then our free report on Shenzhen Institute of Building Research will help you uncover what's on the horizon.

What Are Revenue Growth Metrics Telling Us About The High P/S?

Shenzhen Institute of Building Research's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 19%. This means it has also seen a slide in revenue over the longer-term as revenue is down 20% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Turning to the outlook, the next year should generate growth of 21% as estimated by the only analyst watching the company. Meanwhile, the rest of the industry is forecast to expand by 92%, which is noticeably more attractive.

In light of this, it's alarming that Shenzhen Institute of Building Research's P/S sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

What Does Shenzhen Institute of Building Research's P/S Mean For Investors?

Despite the recent share price weakness, Shenzhen Institute of Building Research's P/S remains higher than most other companies in the industry. 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.

It comes as a surprise to see Shenzhen Institute of Building Research trade at such a high P/S given the revenue forecasts look less than stellar. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 4 warning signs for Shenzhen Institute of Building Research you should be aware of, and 2 of them are concerning.

If you're unsure about the strength of Shenzhen Institute of Building Research'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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