Jiangsu Dagang Co., Ltd.'s (SZSE:002077) 37% Share Price Surge Not Quite Adding Up

Jiangsu Dagang Co., Ltd. (SZSE:002077) shareholders have had their patience rewarded with a 37% share price jump in the last month. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 6.3% in the last twelve months.

Following the firm bounce in price, given around half the companies in China's Real Estate industry have price-to-sales ratios (or "P/S") below 2x, you may consider Jiangsu Dagang as a stock to avoid entirely with its 21.1x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Jiangsu Dagang

What Does Jiangsu Dagang's Recent Performance Look Like?

For instance, Jiangsu Dagang's receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is high because investors think the company will still do 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.

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 Jiangsu Dagang's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Jiangsu Dagang?

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

Retrospectively, the last year delivered a frustrating 22% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 46% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 10% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we find it worrying that Jiangsu Dagang's P/S exceeds that of its industry peers. 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 Key Takeaway

The strong share price surge has lead to Jiangsu Dagang's P/S soaring as well. 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.

Our examination of Jiangsu Dagang 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. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

Before you take the next step, you should know about the 2 warning signs for Jiangsu Dagang that we have uncovered.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.