There's Reason For Concern Over DR Corporation Limited's (SZSE:301177) Price

DR Corporation Limited's (SZSE:301177) price-to-sales (or "P/S") ratio of 6.4x may look like a poor investment opportunity when you consider close to half the companies in the Luxury industry in China have P/S ratios below 1.7x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for DR

What Does DR's Recent Performance Look Like?

While the industry has experienced revenue growth lately, DR's revenue has gone into reverse gear, which is not great. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on analyst estimates for the company? Then our free report on DR will help you uncover what's on the horizon.

How Is DR's Revenue Growth Trending?

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

Retrospectively, the last year delivered a frustrating 35% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 65% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Turning to the outlook, the next year should bring diminished returns, with revenue decreasing 3.8% as estimated by the three analysts watching the company. Meanwhile, the broader industry is forecast to expand by 14%, which paints a poor picture.

With this information, we find it concerning that DR is trading at a P/S higher than the industry. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as these declining revenues are likely to weigh heavily on the share price eventually.

The Bottom Line On DR's P/S

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.

We've established that DR currently trades on a much higher than expected P/S for a company whose revenues are forecast to decline. Right now we aren't comfortable with the high P/S as the predicted future revenue decline likely to impact the positive sentiment that's propping up the P/S. Unless these conditions improve markedly, it'll be a challenging time for shareholders.

You always need to take note of risks, for example - DR has 2 warning signs we think you should be aware of.

If these risks are making you reconsider your opinion on DR, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.