Revenues Not Telling The Story For Shenzhen New Land Tool Planning & Architectural Design Co., Ltd. (SZSE:300778) After Shares Rise 49%

The Shenzhen New Land Tool Planning & Architectural Design Co., Ltd. (SZSE:300778) share price has done very well over the last month, posting an excellent gain of 49%. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 4.3% over the last year.

Following the firm bounce in price, when almost half of the companies in China's Professional Services industry have price-to-sales ratios (or "P/S") below 3.2x, you may consider Shenzhen New Land Tool Planning & Architectural Design as a stock not worth researching with its 11.3x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for Shenzhen New Land Tool Planning & Architectural Design

What Does Shenzhen New Land Tool Planning & Architectural Design's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Shenzhen New Land Tool Planning & Architectural Design 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. If not, then existing shareholders may be quite 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 Shenzhen New Land Tool Planning & Architectural Design will help you shine a light on its historical performance.

How Is Shenzhen New Land Tool Planning & Architectural Design's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Shenzhen New Land Tool Planning & Architectural Design's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered a frustrating 38% decrease to the company's top line. As a result, revenue from three years ago have also fallen 42% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 31% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Shenzhen New Land Tool Planning & Architectural Design's P/S exceeds that of its industry peers. 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.

The Final Word

The strong share price surge has lead to Shenzhen New Land Tool Planning & Architectural Design's P/S soaring as well. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Shenzhen New Land Tool Planning & Architectural Design currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Plus, you should also learn about these 2 warning signs we've spotted with Shenzhen New Land Tool Planning & Architectural Design (including 1 which is significant).

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.