Shenyang Commercial City Co.,Ltd.'s (SHSE:600306) Popularity With Investors Under Threat As Stock Sinks 26%

Shenyang Commercial City Co.,Ltd. (SHSE:600306) shareholders that were waiting for something to happen have been dealt a blow with a 26% share price drop in the last month. Looking back over the past twelve months the stock has been a solid performer regardless, with a gain of 15%.

Even after such a large drop in price, given around half the companies in China's Multiline Retail industry have price-to-sales ratios (or "P/S") below 1.7x, you may still consider Shenyang Commercial CityLtd as a stock to avoid entirely with its 22.2x 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.

View our latest analysis for Shenyang Commercial CityLtd

What Does Shenyang Commercial CityLtd's P/S Mean For Shareholders?

Shenyang Commercial CityLtd certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. The P/S ratio is probably high because investors think this strong revenue growth will be enough to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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 Shenyang Commercial CityLtd's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Shenyang Commercial CityLtd?

Shenyang Commercial CityLtd's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 37%. However, this wasn't enough as the latest three year period has seen the company endure a nasty 55% drop in revenue in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

In contrast to the company, the rest of the industry is expected to grow by 24% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Shenyang Commercial CityLtd's P/S exceeds that of its industry peers. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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 Shenyang Commercial CityLtd's P/S

Shenyang Commercial CityLtd's shares may have suffered, but its P/S remains high. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of Shenyang Commercial CityLtd 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. 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. 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.

Plus, you should also learn about these 5 warning signs we've spotted with Shenyang Commercial CityLtd.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.