Shenzhen Hemei Group Co.,LTD.'s (SZSE:002356) Popularity With Investors Under Threat As Stock Sinks 25%

Shenzhen Hemei Group Co.,LTD. (SZSE:002356) shareholders won't be pleased to see that the share price has had a very rough month, dropping 25% and undoing the prior period's positive performance. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 33% share price drop.

Although its price has dipped substantially, you could still be forgiven for thinking Shenzhen Hemei GroupLTD is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 21.5x, considering almost half the companies in China's Specialty Retail industry have P/S ratios below 1.6x. 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 Shenzhen Hemei GroupLTD

What Does Shenzhen Hemei GroupLTD's Recent Performance Look Like?

Shenzhen Hemei GroupLTD has been doing a good job lately as it's been growing revenue at a solid pace. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders may be a little nervous about the viability of the share price.

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 Shenzhen Hemei GroupLTD's earnings, revenue and cash flow.

How Is Shenzhen Hemei GroupLTD's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Shenzhen Hemei GroupLTD's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 23% last year. Still, revenue has fallen 52% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

Comparing that to the industry, which is predicted to deliver 16% 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 Shenzhen Hemei GroupLTD'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 Bottom Line On Shenzhen Hemei GroupLTD's P/S

A significant share price dive has done very little to deflate Shenzhen Hemei GroupLTD's very lofty P/S. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the 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. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Shenzhen Hemei GroupLTD with six simple checks on some of these key factors.

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.