More Unpleasant Surprises Could Be In Store For SEP Analytical (Shanghai) Co., Ltd.'s (SZSE:301228) Shares After Tumbling 26%

Unfortunately for some shareholders, the SEP Analytical (Shanghai) Co., Ltd. (SZSE:301228) share price has dived 26% in the last thirty days, prolonging recent pain. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 33% in that time.

Even after such a large drop in price, given close to half the companies operating in China's Professional Services industry have price-to-sales ratios (or "P/S") below 2.7x, you may still consider SEP Analytical (Shanghai) as a stock to potentially avoid with its 3.4x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

Check out our latest analysis for SEP Analytical (Shanghai)

What Does SEP Analytical (Shanghai)'s P/S Mean For Shareholders?

Revenue has risen at a steady rate over the last year for SEP Analytical (Shanghai), which is generally not a bad outcome. One possibility is that the P/S ratio is high because investors think this good revenue growth will be 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.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on SEP Analytical (Shanghai)'s earnings, revenue and cash flow.

How Is SEP Analytical (Shanghai)'s Revenue Growth Trending?

There's an inherent assumption that a company should outperform the industry for P/S ratios like SEP Analytical (Shanghai)'s to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 5.5% last year. The solid recent performance means it was also able to grow revenue by 8.6% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 92% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in mind, we find it worrying that SEP Analytical (Shanghai)'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. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What Does SEP Analytical (Shanghai)'s P/S Mean For Investors?

There's still some elevation in SEP Analytical (Shanghai)'s P/S, even if the same can't be said for its share price recently. 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.

The fact that SEP Analytical (Shanghai) currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

You should always think about risks. Case in point, we've spotted 2 warning signs for SEP Analytical (Shanghai) you should be aware of.

If these risks are making you reconsider your opinion on SEP Analytical (Shanghai), explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.