Shenzhen New Land Tool Planning & Architectural Design Co., Ltd.'s (SZSE:300778) Popularity With Investors Under Threat As Stock Sinks 30%

Shenzhen New Land Tool Planning & Architectural Design Co., Ltd. (SZSE:300778) shareholders won't be pleased to see that the share price has had a very rough month, dropping 30% and undoing the prior period's positive performance. For any long-term shareholders, the last month ends a year to forget by locking in a 58% share price decline.

In spite of the heavy fall in price, given around half the companies in China's Professional Services industry have price-to-sales ratios (or "P/S") below 2.8x, you may still consider Shenzhen New Land Tool Planning & Architectural Design as a stock to avoid entirely with its 6.3x 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. 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 New Land Tool Planning & Architectural Design, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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

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.

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 34%. The last three years don't look nice either as the company has shrunk revenue by 32% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 47% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

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. 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

Even after such a strong price drop, Shenzhen New Land Tool Planning & Architectural Design's P/S still exceeds the industry median significantly. 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 New Land Tool Planning & Architectural Design 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. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Shenzhen New Land Tool Planning & Architectural Design (at least 2 which are a bit concerning), and understanding them should be part of your investment process.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.