Shenzhen Etmade Automatic Equipment Co., Ltd.'s (SZSE:300812) 37% Price Boost Is Out Of Tune With Revenues

Shenzhen Etmade Automatic Equipment Co., Ltd. (SZSE:300812) shareholders would be excited to see that the share price has had a great month, posting a 37% gain and recovering from prior weakness. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 6.9% over the last year.

Following the firm bounce in price, Shenzhen Etmade Automatic Equipment's price-to-sales (or "P/S") ratio of 9.3x might make it look like a strong sell right now compared to other companies in the Semiconductor industry in China, where around half of the companies have P/S ratios below 6.2x and even P/S below 3x are quite common. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Shenzhen Etmade Automatic Equipment

How Shenzhen Etmade Automatic Equipment Has Been Performing

For example, consider that Shenzhen Etmade Automatic Equipment's financial performance has been poor lately as its revenue has been in decline. 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.

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 Etmade Automatic Equipment's earnings, revenue and cash flow.

How Is Shenzhen Etmade Automatic Equipment's Revenue Growth Trending?

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

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 44%. As a result, revenue from three years ago have also fallen 18% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 37% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Shenzhen Etmade Automatic Equipment'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. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What We Can Learn From Shenzhen Etmade Automatic Equipment's P/S?

Shenzhen Etmade Automatic Equipment's P/S has grown nicely over the last month thanks to a handy boost in the share price. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Shenzhen Etmade Automatic Equipment 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. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

Before you take the next step, you should know about the 2 warning signs for Shenzhen Etmade Automatic Equipment (1 doesn't sit too well with us!) that we have uncovered.

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.