Shanghai DragonNet Technology Co.,Ltd.'s (SZSE:300245) 30% Share Price Plunge Could Signal Some Risk

Shanghai DragonNet Technology Co.,Ltd. (SZSE:300245) shares have retraced a considerable 30% in the last month, reversing a fair amount of their solid recent performance. Looking at the bigger picture, even after this poor month the stock is up 64% in the last year.

Although its price has dipped substantially, Shanghai DragonNet TechnologyLtd may still be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 9.1x, since almost half of all companies in the IT industry in China have P/S ratios under 4.1x and even P/S lower than 2x are not unusual. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Shanghai DragonNet TechnologyLtd

What Does Shanghai DragonNet TechnologyLtd's Recent Performance Look Like?

For instance, Shanghai DragonNet TechnologyLtd's receding revenue in recent times would have to be some food for thought. 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. However, if this isn't the case, investors might get caught out paying too much for the stock.

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 Shanghai DragonNet TechnologyLtd's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Shanghai DragonNet TechnologyLtd?

In order to justify its P/S ratio, Shanghai DragonNet TechnologyLtd would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a frustrating 26% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 21% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 17% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's alarming that Shanghai DragonNet TechnologyLtd's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What Does Shanghai DragonNet TechnologyLtd's P/S Mean For Investors?

Even after such a strong price drop, Shanghai DragonNet TechnologyLtd's P/S still exceeds the industry median significantly. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Shanghai DragonNet TechnologyLtd revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Shanghai DragonNet TechnologyLtd, and understanding these should be part of your investment process.

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.

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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.