Risks Still Elevated At These Prices As Guangdong Highsun Group Co.,Ltd. (SZSE:000861) Shares Dive 25%

Guangdong Highsun Group Co.,Ltd. (SZSE:000861) shareholders that were waiting for something to happen have been dealt a blow with a 25% share price drop in the last month. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 42% in that time.

In spite of the heavy fall in price, given close to half the companies operating in China's Real Estate industry have price-to-sales ratios (or "P/S") below 1.7x, you may still consider Guangdong Highsun GroupLtd as a stock to potentially avoid with its 3.2x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

View our latest analysis for Guangdong Highsun GroupLtd

How Has Guangdong Highsun GroupLtd Performed Recently?

As an illustration, revenue has deteriorated at Guangdong Highsun GroupLtd over the last year, which is not ideal at all. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. 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 Guangdong Highsun GroupLtd will help you shine a light on its historical performance.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Guangdong Highsun GroupLtd's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 8.0% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 27% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 5.0% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's alarming that Guangdong Highsun GroupLtd's P/S sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What Does Guangdong Highsun GroupLtd's P/S Mean For Investors?

There's still some elevation in Guangdong Highsun GroupLtd's P/S, even if the same can't be said for its share price recently. 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.

Our examination of Guangdong Highsun GroupLtd revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Guangdong Highsun GroupLtd (2 don't sit too well with us!) that you need to be mindful of.

If these risks are making you reconsider your opinion on Guangdong Highsun GroupLtd, 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com