Why Investors Shouldn't Be Surprised By Anhui Wantong Technology Co.,Ltd.'s (SZSE:002331) 25% Share Price Plunge

Anhui Wantong Technology Co.,Ltd. (SZSE:002331) shares have had a horrible month, losing 25% after a relatively good period beforehand. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 16% in that time.

After such a large drop in price, Anhui Wantong TechnologyLtd may be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 2.7x, since almost half of all companies in the IT industry in China have P/S ratios greater than 3.8x and even P/S higher than 7x are not unusual. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Anhui Wantong TechnologyLtd

What Does Anhui Wantong TechnologyLtd's Recent Performance Look Like?

The recent revenue growth at Anhui Wantong TechnologyLtd would have to be considered satisfactory if not spectacular. One possibility is that the P/S ratio is low because investors think this good revenue growth might actually underperform the broader industry in the near future. If that doesn't eventuate, then existing shareholders may have reason to be optimistic about the future direction 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 Anhui Wantong TechnologyLtd's earnings, revenue and cash flow.

Is There Any Revenue Growth Forecasted For Anhui Wantong TechnologyLtd?

Anhui Wantong TechnologyLtd's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 3.9% last year. However, this wasn't enough as the latest three year period has seen an unpleasant 20% overall drop in revenue. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 17% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we are not surprised that Anhui Wantong TechnologyLtd is trading at a P/S lower than the industry. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Bottom Line On Anhui Wantong TechnologyLtd's P/S

Anhui Wantong TechnologyLtd's recently weak share price has pulled its P/S back below other IT companies. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of Anhui Wantong TechnologyLtd confirms that the company's shrinking revenue over the past medium-term is a key factor in its low price-to-sales ratio, given the industry is projected 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.

You should always think about risks. Case in point, we've spotted 1 warning sign for Anhui Wantong TechnologyLtd you should be aware of.

If you're unsure about the strength of Anhui Wantong TechnologyLtd'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.