Improved Revenues Required Before Guangzhou Grandbuy Co., Ltd. (SZSE:002187) Stock's 37% Jump Looks Justified

Guangzhou Grandbuy Co., Ltd. (SZSE:002187) shares have continued their recent momentum with a 37% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 64%.

Although its price has surged higher, Guangzhou Grandbuy may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 1.4x, since almost half of all companies in the Multiline Retail industry in China have P/S ratios greater than 1.9x and even P/S higher than 6x are not unusual. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Guangzhou Grandbuy

How Has Guangzhou Grandbuy Performed Recently?

For example, consider that Guangzhou Grandbuy's financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the recent revenue performance isn't good enough to keep up the industry, causing the P/S ratio to suffer. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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

How Is Guangzhou Grandbuy's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as low as Guangzhou Grandbuy's is when the company's growth is on track to lag the industry.

Retrospectively, the last year delivered a frustrating 6.8% 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 11% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 9.3% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's understandable that Guangzhou Grandbuy's P/S would sit below the majority of other companies. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

The Key Takeaway

Despite Guangzhou Grandbuy's share price climbing recently, its P/S still lags most other companies. 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.

As we suspected, our examination of Guangzhou Grandbuy revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Plus, you should also learn about these 3 warning signs we've spotted with Guangzhou Grandbuy.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.