Shanghai Lonyer Data Co., Ltd. (SHSE:603003) Surges 36% Yet Its Low P/S Is No Reason For Excitement

Shanghai Lonyer Data Co., Ltd. (SHSE:603003) shareholders are no doubt pleased to see that the share price has bounced 36% in the last month, although it is still struggling to make up recently lost ground. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 6.7% over the last year.

Although its price has surged higher, it would still be understandable if you think Shanghai Lonyer Data is a stock with good investment prospects with a price-to-sales ratios (or "P/S") of 0.5x, considering almost half the companies in China's Oil and Gas industry have P/S ratios above 1.3x. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Shanghai Lonyer Data

What Does Shanghai Lonyer Data's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Shanghai Lonyer Data over the last year, which is not ideal at all. One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future. Those who are bullish on Shanghai Lonyer Data will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Shanghai Lonyer Data will help you shine a light on its historical performance.

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

Shanghai Lonyer Data's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 22%. The last three years don't look nice either as the company has shrunk revenue by 22% in aggregate. 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 2.4% 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 understand why Shanghai Lonyer Data's P/S is lower than most of its industry peers. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

The Bottom Line On Shanghai Lonyer Data's P/S

Shanghai Lonyer Data's stock price has surged recently, but its but its P/S still remains modest. 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.

As we suspected, our examination of Shanghai Lonyer Data revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Given the current circumstances, it seems unlikely that the share price will experience any significant movement in either direction in the near future if recent medium-term revenue trends persist.

Plus, you should also learn about this 1 warning sign we've spotted with Shanghai Lonyer Data.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.