Shenzhen GuoHua Network Security Technology Co., Ltd.'s (SZSE:000004) Popularity With Investors Under Threat As Stock Sinks 27%

Shenzhen GuoHua Network Security Technology Co., Ltd. (SZSE:000004) shareholders that were waiting for something to happen have been dealt a blow with a 27% share price drop in the last month. Indeed, the recent drop has reduced its annual gain to a relatively sedate 4.3% over the last twelve months.

In spite of the heavy fall in price, Shenzhen GuoHua Network Security Technology may still be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 8.7x, when you consider almost half of the companies in the Software industry in China have P/S ratios under 4.8x and even P/S lower than 2x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for Shenzhen GuoHua Network Security Technology

What Does Shenzhen GuoHua Network Security Technology's Recent Performance Look Like?

For example, consider that Shenzhen GuoHua Network Security Technology's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. If not, then existing shareholders may be quite 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 Shenzhen GuoHua Network Security Technology's earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Shenzhen GuoHua Network Security Technology would need to produce outstanding growth that's well in excess of 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 21%. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 11% in total. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

This is in contrast to the rest of the industry, which is expected to grow by 31% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Shenzhen GuoHua Network Security Technology is trading at a P/S higher than the industry. It seems most investors are ignoring the fairly limited recent growth rates 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 recent growth rates.

What We Can Learn From Shenzhen GuoHua Network Security Technology's P/S?

Shenzhen GuoHua Network Security Technology's shares may have suffered, but its P/S remains high. 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.

The fact that Shenzhen GuoHua Network Security Technology currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Shenzhen GuoHua Network Security Technology (of which 1 doesn't sit too well with us!) you should know about.

If these risks are making you reconsider your opinion on Shenzhen GuoHua Network Security Technology, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.