Zhengyuan Zhihui Group Co.,Ltd. (SZSE:300645) Shares Fly 27% But Investors Aren't Buying For Growth

Zhengyuan Zhihui Group Co.,Ltd. (SZSE:300645) shareholders are no doubt pleased to see that the share price has bounced 27% in the last month, although it is still struggling to make up recently lost ground. Looking back a bit further, it's encouraging to see the stock is up 56% in the last year.

Even after such a large jump in price, Zhengyuan Zhihui GroupLtd may still look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 1.9x, considering almost half of all companies in the IT industry in China have P/S ratios greater than 5.3x and even P/S higher than 10x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.

See our latest analysis for Zhengyuan Zhihui GroupLtd

What Does Zhengyuan Zhihui GroupLtd's P/S Mean For Shareholders?

For instance, Zhengyuan Zhihui GroupLtd's receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future. Those who are bullish on Zhengyuan Zhihui GroupLtd will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

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 Zhengyuan Zhihui GroupLtd's earnings, revenue and cash flow.

What Are Revenue Growth Metrics Telling Us About The Low P/S?

There's an inherent assumption that a company should far underperform the industry for P/S ratios like Zhengyuan Zhihui GroupLtd's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 3.5% decrease to the company's top line. Even so, admirably revenue has lifted 41% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

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

With this information, we can see why Zhengyuan Zhihui GroupLtd is trading at a P/S lower than the industry. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Key Takeaway

Even after such a strong price move, Zhengyuan Zhihui GroupLtd's P/S still trails the rest of the industry. 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.

Our examination of Zhengyuan Zhihui GroupLtd confirms that the company's revenue trends over the past three-year years are a key factor in its low price-to-sales ratio, as we suspected, given they fall short of current industry expectations. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

You need to take note of risks, for example - Zhengyuan Zhihui GroupLtd has 3 warning signs (and 1 which is significant) we think you should know about.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.