Optimistic Investors Push Shanghai Metersbonwe Fashion and Accessories Co., Ltd. (SZSE:002269) Shares Up 32% But Growth Is Lacking

Despite an already strong run, Shanghai Metersbonwe Fashion and Accessories Co., Ltd. (SZSE:002269) shares have been powering on, with a gain of 32% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 35% in the last year.

After such a large jump in price, given around half the companies in China's Luxury industry have price-to-sales ratios (or "P/S") below 1.8x, you may consider Shanghai Metersbonwe Fashion and Accessories as a stock to avoid entirely with its 6.2x 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.

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. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. 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 Shanghai Metersbonwe Fashion and Accessories' earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Shanghai Metersbonwe Fashion and Accessories?

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 20%. As a result, revenue from three years ago have also fallen 66% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

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.

With this in mind, we find it worrying that Shanghai Metersbonwe Fashion and Accessories' 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. 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.

What We Can Learn From Shanghai Metersbonwe Fashion and Accessories' P/S?

Shanghai Metersbonwe Fashion and Accessories' P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

We've established that Shanghai Metersbonwe Fashion and Accessories currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. 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.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Shanghai Metersbonwe Fashion and Accessories that you need to be mindful of.

If you're unsure about the strength of Shanghai Metersbonwe Fashion and Accessories' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.