Some Confidence Is Lacking In Jinfa Labi Maternity & Baby Articles Co., Ltd (SZSE:002762) As Shares Slide 26%

To the annoyance of some shareholders, Jinfa Labi Maternity & Baby Articles Co., Ltd (SZSE:002762) shares are down a considerable 26% in the last month, which continues a horrid run for the company. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 39% in that time.

Even after such a large drop in price, given around half the companies in China's Luxury industry have price-to-sales ratios (or "P/S") below 1.6x, you may still consider Jinfa Labi Maternity & Baby Articles as a stock to avoid entirely with its 10.7x 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 Jinfa Labi Maternity & Baby Articles

How Jinfa Labi Maternity & Baby Articles Has Been Performing

As an illustration, revenue has deteriorated at Jinfa Labi Maternity & Baby Articles over the last year, which is not ideal at all. 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. If not, then existing shareholders may be quite nervous about the viability of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Jinfa Labi Maternity & Baby Articles will help you shine a light on its historical performance.

How Is Jinfa Labi Maternity & Baby Articles' Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Jinfa Labi Maternity & Baby Articles' is when the company's growth is on track to outshine the industry decidedly.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 16%. The last three years don't look nice either as the company has shrunk revenue by 39% in aggregate. 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 18% shows it's an unpleasant look.

With this in mind, we find it worrying that Jinfa Labi Maternity & Baby Articles' 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. 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 Final Word

A significant share price dive has done very little to deflate Jinfa Labi Maternity & Baby Articles' very lofty 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 Jinfa Labi Maternity & Baby Articles 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 recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Having said that, be aware Jinfa Labi Maternity & Baby Articles is showing 2 warning signs in our investment analysis, you should know about.

If you're unsure about the strength of Jinfa Labi Maternity & Baby Articles' 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.