Shenzhen Baoming Technology Co.,Ltd.'s (SZSE:002992) Shares May Have Run Too Fast Too Soon

With a price-to-sales (or "P/S") ratio of 7x Shenzhen Baoming Technology Co.,Ltd. (SZSE:002992) may be sending bearish signals at the moment, given that almost half of all Semiconductor companies in China have P/S ratios under 4.9x and even P/S lower than 2x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

See our latest analysis for Shenzhen Baoming TechnologyLtd

What Does Shenzhen Baoming TechnologyLtd's P/S Mean For Shareholders?

Shenzhen Baoming TechnologyLtd certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Keen to find out how analysts think Shenzhen Baoming TechnologyLtd's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Shenzhen Baoming TechnologyLtd's Revenue Growth Trending?

In order to justify its P/S ratio, Shenzhen Baoming TechnologyLtd would need to produce impressive growth in excess of the industry.

Taking a look back first, we see that the company grew revenue by an impressive 23% last year. However, this wasn't enough as the latest three year period has seen the company endure a nasty 12% drop in revenue in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Turning to the outlook, the next year should generate growth of 32% as estimated by the lone analyst watching the company. Meanwhile, the rest of the industry is forecast to expand by 37%, which is noticeably more attractive.

With this in consideration, we believe it doesn't make sense that Shenzhen Baoming TechnologyLtd's P/S is outpacing its industry peers. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

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.

We've concluded that Shenzhen Baoming TechnologyLtd currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It is also worth noting that we have found 2 warning signs for Shenzhen Baoming TechnologyLtd that you need to take into consideration.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.