There's Reason For Concern Over ENC Digital Technology Co., Ltd's (SHSE:603869) Massive 31% Price Jump

Despite an already strong run, ENC Digital Technology Co., Ltd (SHSE:603869) shares have been powering on, with a gain of 31% in the last thirty days. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 35% in the last twelve months.

Even after such a large jump in price, there still wouldn't be many who think ENC Digital Technology's price-to-sales (or "P/S") ratio of 4.5x is worth a mention when the median P/S in China's IT industry is similar at about 4.9x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for ENC Digital Technology

What Does ENC Digital Technology's P/S Mean For Shareholders?

For example, consider that ENC Digital Technology's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is moderate because investors think the company might still do enough to be in line with the broader industry in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

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 ENC Digital Technology's earnings, revenue and cash flow.

Do Revenue Forecasts Match The P/S Ratio?

ENC Digital Technology's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

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 24%. This means it has also seen a slide in revenue over the longer-term as revenue is down 32% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 19% shows it's an unpleasant look.

With this information, we find it concerning that ENC Digital Technology is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. 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.

What Does ENC Digital Technology's P/S Mean For Investors?

Its shares have lifted substantially and now ENC Digital Technology's P/S is back within range of the industry median. 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.

We find it unexpected that ENC Digital Technology 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. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Before you take the next step, you should know about the 1 warning sign for ENC Digital Technology that we have uncovered.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.