Zhejiang Canaan Technology Limited (SZSE:300412) Shares Fly 36% But Investors Aren't Buying For Growth

Zhejiang Canaan Technology Limited (SZSE:300412) shares have continued their recent momentum with a 36% gain in the last month alone. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 3.3% over the last year.

Even after such a large jump in price, considering about half the companies operating in China's Medical Equipment industry have price-to-sales ratios (or "P/S") above 6.6x, you may still consider Zhejiang Canaan Technology as an great investment opportunity with its 2.4x P/S ratio. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Zhejiang Canaan Technology

What Does Zhejiang Canaan Technology's P/S Mean For Shareholders?

For example, consider that Zhejiang Canaan Technology's financial performance has been pretty ordinary lately as revenue growth is non-existent. One possibility is that the P/S is low because investors think this benign revenue growth rate will likely underperform the broader industry in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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

Do Revenue Forecasts Match The Low P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as depressed as Zhejiang Canaan Technology's is when the company's growth is on track to lag the industry decidedly.

Retrospectively, the last year delivered virtually the same number to the company's top line as the year before. This isn't what shareholders were looking for as it means they've been left with a 2.0% decline in revenue over the last three years in total. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 26% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this information, we are not surprised that Zhejiang Canaan Technology is trading at a P/S lower than the industry. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

What We Can Learn From Zhejiang Canaan Technology's P/S?

Shares in Zhejiang Canaan Technology have risen appreciably however, its P/S is still subdued. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Zhejiang Canaan Technology confirms that the company's shrinking revenue over the past medium-term is a key factor in its low price-to-sales ratio, given the industry is projected 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. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Before you settle on your opinion, we've discovered 2 warning signs for Zhejiang Canaan Technology (1 doesn't sit too well with us!) that you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.