Shanghai Metersbonwe Fashion and Accessories Co., Ltd.'s (SZSE:002269) Price Is Out Of Tune With Revenues

When close to half the companies in the Luxury industry in China have price-to-sales ratios (or "P/S") below 1.5x, you may consider Shanghai Metersbonwe Fashion and Accessories Co., Ltd. (SZSE:002269) as a stock to potentially avoid with its 2.8x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

See our latest analysis for Shanghai Metersbonwe Fashion and Accessories

How Shanghai Metersbonwe Fashion and Accessories Has Been Performing

For example, consider that Shanghai Metersbonwe Fashion and Accessories' financial performance has been poor lately as its revenue has been in decline. 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. If not, then existing shareholders may be quite nervous about the viability of the share price.

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.

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as high as Shanghai Metersbonwe Fashion and Accessories' is when the company's growth is on track to outshine the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 22%. This means it has also seen a slide in revenue over the longer-term as revenue is down 68% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 18% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that Shanghai Metersbonwe Fashion and Accessories is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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?

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. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. 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.

You should always think about risks. Case in point, we've spotted 1 warning sign for Shanghai Metersbonwe Fashion and Accessories you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.