Getting In Cheap On Shanghai Metersbonwe Fashion and Accessories Co., Ltd. (SZSE:002269) Is Unlikely

Shanghai Metersbonwe Fashion and Accessories Co., Ltd.'s (SZSE:002269) price-to-sales (or "P/S") ratio of 3.6x may look like a poor investment opportunity when you consider close to half the companies in the Luxury industry in China have P/S ratios below 1.5x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Shanghai Metersbonwe Fashion and Accessories

What Does Shanghai Metersbonwe Fashion and Accessories' P/S Mean For Shareholders?

For example, consider that Shanghai Metersbonwe Fashion and Accessories' financial performance has been poor lately as its revenue has been in decline. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Shanghai Metersbonwe Fashion and Accessories will help you shine a light on its historical performance.

How Is Shanghai Metersbonwe Fashion and Accessories' Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Shanghai Metersbonwe Fashion and Accessories' to be considered reasonable.

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 4.9%. The last three years don't look nice either as the company has shrunk revenue by 66% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 15% shows it's an unpleasant look.

In light of this, it's alarming that Shanghai Metersbonwe Fashion and Accessories' 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. 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 Key Takeaway

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Shanghai Metersbonwe Fashion and Accessories 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. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

Having said that, be aware Shanghai Metersbonwe Fashion and Accessories is showing 1 warning sign in our investment analysis, you should know about.

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.