Zhejiang Canaan Technology Limited (SZSE:300412) Surges 42% Yet Its Low P/S Is No Reason For Excitement

Zhejiang Canaan Technology Limited (SZSE:300412) shareholders are no doubt pleased to see that the share price has bounced 42% in the last month, although it is still struggling to make up recently lost ground. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 36% in the last twelve months.

Although its price has surged higher, Zhejiang Canaan Technology may still look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 1.8x, considering almost half of all companies in the Medical Equipment industry in China have P/S ratios greater than 5.6x and even P/S higher than 9x aren't out of the ordinary. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Zhejiang Canaan Technology

How Zhejiang Canaan Technology Has Been Performing

For example, consider that Zhejiang Canaan Technology's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. 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.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Zhejiang Canaan Technology's earnings, revenue and cash flow.

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

Zhejiang Canaan Technology's P/S ratio would be typical for a company that's expected to deliver very poor growth or even falling revenue, and importantly, perform much 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 5.1%. At least revenue has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

This is in contrast to the rest of the industry, which is expected to grow by 26% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Zhejiang Canaan Technology's P/S sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

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

Even after such a strong price move, Zhejiang Canaan Technology's P/S still trails the rest of the industry. 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.

As we suspected, our examination of Zhejiang Canaan Technology revealed its three-year revenue trends are contributing to its low P/S, given they look worse than current industry expectations. 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.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Zhejiang Canaan Technology (1 is significant) 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.