Shenzhen Zhenye (Group) Co.,Ltd. (SZSE:000006) Stock's 27% Dive Might Signal An Opportunity But It Requires Some Scrutiny

The Shenzhen Zhenye (Group) Co.,Ltd. (SZSE:000006) share price has softened a substantial 27% over the previous 30 days, handing back much of the gains the stock has made lately. Looking at the bigger picture, even after this poor month the stock is up 53% in the last year.

Since its price has dipped substantially, Shenzhen Zhenye (Group)Ltd's price-to-sales (or "P/S") ratio of 1.4x might make it look like a buy right now compared to the Real Estate industry in China, where around half of the companies have P/S ratios above 2.2x and even P/S above 6x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Shenzhen Zhenye (Group)Ltd

What Does Shenzhen Zhenye (Group)Ltd's P/S Mean For Shareholders?

Recent times have been quite advantageous for Shenzhen Zhenye (Group)Ltd as its revenue has been rising very briskly. It might be that many expect the strong revenue performance to degrade substantially, which has repressed the P/S ratio. Those who are bullish on Shenzhen Zhenye (Group)Ltd will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

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 Shenzhen Zhenye (Group)Ltd's earnings, revenue and cash flow.

Do Revenue Forecasts Match The Low P/S Ratio?

Shenzhen Zhenye (Group)Ltd'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.

Taking a look back first, we see that the company grew revenue by an impressive 124% last year. The latest three year period has also seen an excellent 87% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Comparing that to the industry, which is only predicted to deliver 12% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised revenue results.

In light of this, it's peculiar that Shenzhen Zhenye (Group)Ltd's P/S sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

What We Can Learn From Shenzhen Zhenye (Group)Ltd's P/S?

The southerly movements of Shenzhen Zhenye (Group)Ltd's shares means its P/S is now sitting at a pretty low level. 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're very surprised to see Shenzhen Zhenye (Group)Ltd currently trading on a much lower than expected P/S since its recent three-year growth is higher than the wider industry forecast. When we see strong revenue with faster-than-industry growth, we assume there are some significant underlying risks to the company's ability to make money which is applying downwards pressure on the P/S ratio. It appears many are indeed anticipating revenue instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

It is also worth noting that we have found 3 warning signs for Shenzhen Zhenye (Group)Ltd that you need to take into consideration.

If these risks are making you reconsider your opinion on Shenzhen Zhenye (Group)Ltd, 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.