More Unpleasant Surprises Could Be In Store For Guang Dong Sitong Group Co.,Ltd's (SHSE:603838) Shares After Tumbling 28%

To the annoyance of some shareholders, Guang Dong Sitong Group Co.,Ltd (SHSE:603838) shares are down a considerable 28% in the last month, which continues a horrid run for the company. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 25% share price drop.

Although its price has dipped substantially, given around half the companies in China's Consumer Durables industry have price-to-sales ratios (or "P/S") below 1.9x, you may still consider Guang Dong Sitong GroupLtd as a stock to avoid entirely with its 8x 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 so lofty.

Check out our latest analysis for Guang Dong Sitong GroupLtd

What Does Guang Dong Sitong GroupLtd's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Guang Dong Sitong GroupLtd over the last year, which is not ideal at all. One possibility is that the P/S is high because investors think the company will still do 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.

Although there are no analyst estimates available for Guang Dong Sitong GroupLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Guang Dong Sitong GroupLtd?

Guang Dong Sitong GroupLtd's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

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 26%. The last three years don't look nice either as the company has shrunk revenue by 19% in aggregate. 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 12% 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 Guang Dong Sitong GroupLtd'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. 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 Bottom Line On Guang Dong Sitong GroupLtd's P/S

Guang Dong Sitong GroupLtd's shares may have suffered, but its P/S remains high. 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've established that Guang Dong Sitong GroupLtd 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. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

You always need to take note of risks, for example - Guang Dong Sitong GroupLtd has 2 warning signs we think you should be aware of.

If these risks are making you reconsider your opinion on Guang Dong Sitong GroupLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.