Shenzhen Fenda Technology Co., Ltd.'s (SZSE:002681) Popularity With Investors Under Threat As Stock Sinks 29%

Shenzhen Fenda Technology Co., Ltd. (SZSE:002681) shares have retraced a considerable 29% in the last month, reversing a fair amount of their solid recent performance. Still, a bad month hasn't completely ruined the past year with the stock gaining 31%, which is great even in a bull market.

In spite of the heavy fall in price, given close to half the companies operating in China's Consumer Durables industry have price-to-sales ratios (or "P/S") below 2x, you may still consider Shenzhen Fenda Technology as a stock to potentially avoid with its 3.8x 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 Shenzhen Fenda Technology

How Shenzhen Fenda Technology Has Been Performing

Shenzhen Fenda Technology has been doing a decent job lately as it's been growing revenue at a reasonable pace. One possibility is that the P/S ratio is high because investors think this good revenue growth will be 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.

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 Shenzhen Fenda Technology's earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Shenzhen Fenda Technology's to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 6.1% last year. Still, lamentably revenue has fallen 26% in aggregate from three years ago, which is disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 10% shows it's an unpleasant look.

With this in mind, we find it worrying that Shenzhen Fenda Technology's 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 Bottom Line On Shenzhen Fenda Technology's P/S

Despite the recent share price weakness, Shenzhen Fenda Technology's P/S remains higher than most other companies in the industry. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Shenzhen Fenda Technology 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. 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.

Before you take the next step, you should know about the 3 warning signs for Shenzhen Fenda Technology (1 is significant!) that we have uncovered.

If you're unsure about the strength of Shenzhen Fenda Technology's 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.