Zhejiang Red Dragonfly Footwear Co., Ltd. (SHSE:603116) May Have Run Too Fast Too Soon With Recent 25% Price Plummet

Zhejiang Red Dragonfly Footwear Co., Ltd. (SHSE:603116) shares have retraced a considerable 25% in the last month, reversing a fair amount of their solid recent performance. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 12% share price drop.

Although its price has dipped substantially, it's still not a stretch to say that Zhejiang Red Dragonfly Footwear's price-to-sales (or "P/S") ratio of 1.4x right now seems quite "middle-of-the-road" compared to the Luxury industry in China, where the median P/S ratio is around 1.5x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

See our latest analysis for Zhejiang Red Dragonfly Footwear

How Zhejiang Red Dragonfly Footwear Has Been Performing

As an illustration, revenue has deteriorated at Zhejiang Red Dragonfly Footwear over the last year, which is not ideal at all. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

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 Zhejiang Red Dragonfly Footwear's earnings, revenue and cash flow.

Is There Some Revenue Growth Forecasted For Zhejiang Red Dragonfly Footwear?

The only time you'd be comfortable seeing a P/S like Zhejiang Red Dragonfly Footwear's is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered a frustrating 7.7% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 18% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 14% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's somewhat alarming that Zhejiang Red Dragonfly Footwear's P/S sits in line with the majority of other companies. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. There's a 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

Zhejiang Red Dragonfly Footwear's plummeting stock price has brought its P/S back to a similar region as the rest of the industry. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We find it unexpected that Zhejiang Red Dragonfly Footwear trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Zhejiang Red Dragonfly Footwear that you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.