Shanghai Shenda Co., Ltd (SHSE:600626) May Have Run Too Fast Too Soon With Recent 29% Price Plummet

The Shanghai Shenda Co., Ltd (SHSE:600626) share price has fared very poorly over the last month, falling by a substantial 29%. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 29% in that time.

Even after such a large drop in price, there still wouldn't be many who think Shanghai Shenda's price-to-sales (or "P/S") ratio of 0.3x is worth a mention when the median P/S in China's Retail Distributors industry is similar at about 0.6x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for Shanghai Shenda

How Has Shanghai Shenda Performed Recently?

Revenue has risen firmly for Shanghai Shenda recently, which is pleasing to see. One possibility is that the P/S is moderate because investors think this respectable revenue growth might not be enough to outperform the broader industry in the near future. Those who are bullish on Shanghai Shenda will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

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

Do Revenue Forecasts Match The P/S Ratio?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Shanghai Shenda's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 15% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 4.6% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 18% shows it's an unpleasant look.

In light of this, it's somewhat alarming that Shanghai Shenda's P/S sits in line with 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 on the share price eventually.

The Final Word

Shanghai Shenda's plummeting stock price has brought its P/S back to a similar region as the rest of the industry. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our look at Shanghai Shenda revealed its shrinking revenues over the medium-term haven't impacted the P/S as much as we anticipated, given the industry is set to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. 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 4 warning signs for Shanghai Shenda (2 can't be ignored!) 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.