Shenzhen Hemei Group Co.,LTD.'s (SZSE:002356) Business Is Trailing The Industry But Its Shares Aren't

When you see that almost half of the companies in the Specialty Retail industry in China have price-to-sales ratios (or "P/S") below 0.9x, Shenzhen Hemei Group Co.,LTD. (SZSE:002356) looks to be giving off strong sell signals with its 27.8x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

View our latest analysis for Shenzhen Hemei GroupLTD

What Does Shenzhen Hemei GroupLTD's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Shenzhen Hemei 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

Is There Enough Revenue Growth Forecasted For Shenzhen Hemei GroupLTD?

The only time you'd be truly comfortable seeing a P/S as steep as Shenzhen Hemei GroupLTD's is when the company's growth is on track to outshine the industry decidedly.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 7.4%. This means it has also seen a slide in revenue over the longer-term as revenue is down 70% in total over the last three years. 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 alarming that Shenzhen Hemei 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. 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 Shenzhen Hemei GroupLTD's P/S

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our examination of Shenzhen Hemei 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. 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. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Shenzhen Hemei GroupLTD you should know about.

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.