Subdued Growth No Barrier To Zhejiang Lianxiang Smart Home Co., LTD (SHSE:603272) With Shares Advancing 29%

Despite an already strong run, Zhejiang Lianxiang Smart Home Co., LTD (SHSE:603272) shares have been powering on, with a gain of 29% in the last thirty days. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 26% over that time.

After such a large jump in price, given around half the companies in China's Consumer Durables industry have price-to-sales ratios (or "P/S") below 2x, you may consider Zhejiang Lianxiang Smart Home as a stock to avoid entirely with its 11.1x 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.

See our latest analysis for Zhejiang Lianxiang Smart Home

How Has Zhejiang Lianxiang Smart Home Performed Recently?

For instance, Zhejiang Lianxiang Smart Home's receding revenue in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, 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.

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 Lianxiang Smart Home's earnings, revenue and cash flow.

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

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Zhejiang Lianxiang Smart Home's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 35% 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 57% in total over the last three years. 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 11% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's alarming that Zhejiang Lianxiang Smart Home's P/S sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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.

The Key Takeaway

Zhejiang Lianxiang Smart Home's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

We've established that Zhejiang Lianxiang Smart Home 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.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Zhejiang Lianxiang Smart Home 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.