Shenzhen Etmade Automatic Equipment Co., Ltd. (SZSE:300812) Shares May Have Slumped 29% But Getting In Cheap Is Still Unlikely

The Shenzhen Etmade Automatic Equipment Co., Ltd. (SZSE:300812) share price has fared very poorly over the last month, falling by a substantial 29%. Longer-term shareholders would now have taken a real hit with the stock declining 3.0% in the last year.

In spite of the heavy fall in price, it's still not a stretch to say that Shenzhen Etmade Automatic Equipment's price-to-sales (or "P/S") ratio of 4.9x right now seems quite "middle-of-the-road" compared to the Semiconductor industry in China, where the median P/S ratio is around 5.9x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Check out our latest analysis for Shenzhen Etmade Automatic Equipment

What Does Shenzhen Etmade Automatic Equipment's P/S Mean For Shareholders?

Revenue has risen at a steady rate over the last year for Shenzhen Etmade Automatic Equipment, which is generally not a bad outcome. Perhaps the expectation moving forward is that the revenue growth will track in line with the wider industry for the near term, which has kept the P/S subdued. 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 not quite in favour.

Although there are no analyst estimates available for Shenzhen Etmade Automatic Equipment, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Do Revenue Forecasts Match The P/S Ratio?

In order to justify its P/S ratio, Shenzhen Etmade Automatic Equipment would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a decent 3.2% gain to the company's revenues. Pleasingly, revenue has also lifted 53% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Comparing that to the industry, which is predicted to deliver 34% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this in mind, we find it intriguing that Shenzhen Etmade Automatic Equipment's P/S is comparable to that of its industry peers. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

What Does Shenzhen Etmade Automatic Equipment's P/S Mean For Investors?

With its share price dropping off a cliff, the P/S for Shenzhen Etmade Automatic Equipment looks to be in line with the rest of the Semiconductor industry. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of Shenzhen Etmade Automatic Equipment revealed its poor three-year revenue trends aren't resulting in a lower P/S as per our expectations, given they look worse than current industry outlook. Right now we are uncomfortable with the P/S as this revenue performance isn't likely to support a more positive sentiment for long. If recent medium-term revenue trends continue, the probability of a share price decline will become quite substantial, placing shareholders at risk.

Having said that, be aware Shenzhen Etmade Automatic Equipment is showing 4 warning signs in our investment analysis, and 3 of those can't be ignored.

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.