What Guangdong Anjubao Digital Technology Co., Ltd.'s (SZSE:300155) 35% Share Price Gain Is Not Telling You

Guangdong Anjubao Digital Technology Co., Ltd. (SZSE:300155) shares have had a really impressive month, gaining 35% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 22% over that time.

After such a large jump in price, you could be forgiven for thinking Guangdong Anjubao Digital Technology is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 8.5x, considering almost half the companies in China's Consumer Durables industry have P/S ratios below 1.7x. 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 Guangdong Anjubao Digital Technology

What Does Guangdong Anjubao Digital Technology's Recent Performance Look Like?

For instance, Guangdong Anjubao Digital Technology's receding revenue in recent times would have to be some food for thought. 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. However, if this isn't the case, investors might get caught out paying too much for the stock.

Although there are no analyst estimates available for Guangdong Anjubao Digital Technology, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

What Are Revenue Growth Metrics Telling Us About The High P/S?

Guangdong Anjubao Digital Technology's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered a frustrating 32% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 70% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 9.2% shows it's an unpleasant look.

With this in mind, we find it worrying that Guangdong Anjubao Digital Technology's 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.

What We Can Learn From Guangdong Anjubao Digital Technology's P/S?

The strong share price surge has lead to Guangdong Anjubao Digital Technology's P/S soaring as well. 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.

We've established that Guangdong Anjubao Digital Technology 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. 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.

Before you settle on your opinion, we've discovered 2 warning signs for Guangdong Anjubao Digital Technology that 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.