Daheng New Epoch Technology Inc.'s (SHSE:600288) Price Is Right But Growth Is Lacking After Shares Rocket 29%

Daheng New Epoch Technology Inc. (SHSE:600288) shares have continued their recent momentum with a 29% gain in the last month alone. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 16% over that time.

Even after such a large jump in price, Daheng New Epoch Technology's price-to-sales (or "P/S") ratio of 2.4x might still make it look like a strong buy right now compared to the wider IT industry in China, where around half of the companies have P/S ratios above 4.8x and even P/S above 9x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.

Check out our latest analysis for Daheng New Epoch Technology

How Daheng New Epoch Technology Has Been Performing

For instance, Daheng New Epoch Technology's receding revenue in recent times would have to be some food for thought. Perhaps the market believes the recent revenue performance isn't good enough to keep up the industry, causing the P/S ratio to suffer. 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 out of favour.

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 Daheng New Epoch Technology's earnings, revenue and cash flow.

Is There Any Revenue Growth Forecasted For Daheng New Epoch Technology?

There's an inherent assumption that a company should far underperform the industry for P/S ratios like Daheng New Epoch Technology's to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 13%. This means it has also seen a slide in revenue over the longer-term as revenue is down 26% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 20% shows it's an unpleasant look.

With this in mind, we understand why Daheng New Epoch Technology's P/S is lower than most of its industry peers. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

The Final Word

Even after such a strong price move, Daheng New Epoch Technology's P/S still trails the rest of the 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.

As we suspected, our examination of Daheng New Epoch Technology revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. Given the current circumstances, it seems unlikely that the share price will experience any significant movement in either direction in the near future if recent medium-term revenue trends persist.

Before you settle on your opinion, we've discovered 1 warning sign for Daheng New Epoch Technology that you should be aware of.

If you're unsure about the strength of Daheng New Epoch Technology's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.