Some Sinodata Co., Ltd. (SZSE:002657) Shareholders Look For Exit As Shares Take 30% Pounding

Sinodata Co., Ltd. (SZSE:002657) shares have had a horrible month, losing 30% 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 27% in that time.

Even after such a large drop in price, you could still be forgiven for feeling indifferent about Sinodata's P/S ratio of 3.6x, since the median price-to-sales (or "P/S") ratio for the Software industry in China is also close to 4.5x. 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 Sinodata

What Does Sinodata's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Sinodata over the last year, which is not ideal at all. 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 you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Sinodata will help you shine a light on its historical performance.

Do Revenue Forecasts Match The P/S Ratio?

The only time you'd be comfortable seeing a P/S like Sinodata's is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered a frustrating 18% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 23% 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 30% shows it's an unpleasant look.

In light of this, it's somewhat alarming that Sinodata's P/S sits in line with the majority of other companies. 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. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

The Key Takeaway

Sinodata's plummeting stock price has brought its P/S back to a similar region as 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.

We find it unexpected that Sinodata 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.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Sinodata (1 doesn't sit too well with us!) that you should be aware of before investing here.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.