DongGuan Winnerway Industry Zone LTD.'s (SZSE:000573) 79% Price Boost Is Out Of Tune With Revenues

DongGuan Winnerway Industry Zone LTD. (SZSE:000573) shareholders have had their patience rewarded with a 79% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 90%.

Since its price has surged higher, you could be forgiven for thinking DongGuan Winnerway Industry Zone is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 6.9x, considering almost half the companies in China's Real Estate industry have P/S ratios below 2.2x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for DongGuan Winnerway Industry Zone

What Does DongGuan Winnerway Industry Zone's P/S Mean For Shareholders?

Revenue has risen firmly for DongGuan Winnerway Industry Zone recently, which is pleasing to see. One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, DongGuan Winnerway Industry Zone would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a decent 8.1% gain to the company's revenues. Still, lamentably revenue has fallen 60% in aggregate from three years ago, which is disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 11% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that DongGuan Winnerway Industry Zone is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Bottom Line On DongGuan Winnerway Industry Zone's P/S

Shares in DongGuan Winnerway Industry Zone have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

We've established that DongGuan Winnerway Industry Zone currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Having said that, be aware DongGuan Winnerway Industry Zone is showing 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant.

If these risks are making you reconsider your opinion on DongGuan Winnerway Industry Zone, 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.