Shen Zhen Australis Electronic Technology Co.,Ltd.'s (SZSE:300940) Popularity With Investors Under Threat As Stock Sinks 29%

Shen Zhen Australis Electronic Technology Co.,Ltd. (SZSE:300940) shareholders that were waiting for something to happen have been dealt a blow with a 29% share price drop in the last month. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 34% share price drop.

Although its price has dipped substantially, there still wouldn't be many who think Shen Zhen Australis Electronic TechnologyLtd's price-to-sales (or "P/S") ratio of 6.1x is worth a mention when the median P/S in China's Semiconductor industry is similar at about 5.7x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for Shen Zhen Australis Electronic TechnologyLtd

What Does Shen Zhen Australis Electronic TechnologyLtd's P/S Mean For Shareholders?

For example, consider that Shen Zhen Australis Electronic TechnologyLtd's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

Although there are no analyst estimates available for Shen Zhen Australis Electronic TechnologyLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Shen Zhen Australis Electronic TechnologyLtd's Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Shen Zhen Australis Electronic TechnologyLtd's to be considered reasonable.

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 20%. The last three years don't look nice either as the company has shrunk revenue by 64% in aggregate. 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 35% shows it's an unpleasant look.

In light of this, it's somewhat alarming that Shen Zhen Australis Electronic TechnologyLtd's P/S sits in line with 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 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 Shen Zhen Australis Electronic TechnologyLtd's P/S

With its share price dropping off a cliff, the P/S for Shen Zhen Australis Electronic TechnologyLtd looks to be in line with the rest of the Semiconductor industry. 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 find it unexpected that Shen Zhen Australis Electronic TechnologyLtd trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Shen Zhen Australis Electronic TechnologyLtd (1 can't be ignored) you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.