Some Zhejiang Busen Garments Co., Ltd. (SZSE:002569) Shareholders Look For Exit As Shares Take 26% Pounding

Unfortunately for some shareholders, the Zhejiang Busen Garments Co., Ltd. (SZSE:002569) share price has dived 26% in the last thirty days, prolonging recent pain. The last month has meant the stock is now only up 8.2% during the last year.

Although its price has dipped substantially, when almost half of the companies in China's Luxury industry have price-to-sales ratios (or "P/S") below 1.6x, you may still consider Zhejiang Busen Garments as a stock not worth researching with its 6.8x P/S ratio. 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 Zhejiang Busen Garments

How Has Zhejiang Busen Garments Performed Recently?

Zhejiang Busen Garments has been doing a good job lately as it's been growing revenue at a solid pace. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. 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 Zhejiang Busen Garments will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For Zhejiang Busen Garments?

In order to justify its P/S ratio, Zhejiang Busen Garments would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a decent 7.5% gain to the company's revenues. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 49% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 14% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we find it worrying that Zhejiang Busen Garments' P/S exceeds that of its industry peers. 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. 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

Even after such a strong price drop, Zhejiang Busen Garments' P/S still exceeds the industry median significantly. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Zhejiang Busen Garments 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. 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.

It is also worth noting that we have found 1 warning sign for Zhejiang Busen Garments that you need to take into consideration.

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.