Sichuan Discovery Dream Science & Technology Co.,Ltd (SZSE:301213) Shares May Have Slumped 30% But Getting In Cheap Is Still Unlikely

The Sichuan Discovery Dream Science & Technology Co.,Ltd (SZSE:301213) share price has fared very poorly over the last month, falling by a substantial 30%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 36% share price drop.

Even after such a large drop in price, Sichuan Discovery Dream Science & TechnologyLtd may still be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 18.3x, since almost half of all companies in the Software industry in China have P/S ratios under 4.7x 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.

View our latest analysis for Sichuan Discovery Dream Science & TechnologyLtd

What Does Sichuan Discovery Dream Science & TechnologyLtd's P/S Mean For Shareholders?

The recent revenue growth at Sichuan Discovery Dream Science & TechnologyLtd would have to be considered satisfactory if not spectacular. Perhaps the market believes the recent revenue performance is strong enough to outperform the industry, which has inflated the P/S ratio. If not, then existing shareholders may be a little nervous about the viability of the share price.

Although there are no analyst estimates available for Sichuan Discovery Dream Science & TechnologyLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Sichuan Discovery Dream Science & TechnologyLtd's Revenue Growth Trending?

Sichuan Discovery Dream Science & TechnologyLtd's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered a decent 7.4% gain to the company's revenues. Still, lamentably revenue has fallen 35% in aggregate from three years ago, which is disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 30% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's alarming that Sichuan Discovery Dream Science & TechnologyLtd's P/S sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What We Can Learn From Sichuan Discovery Dream Science & TechnologyLtd's P/S?

A significant share price dive has done very little to deflate Sichuan Discovery Dream Science & TechnologyLtd's very lofty P/S. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Sichuan Discovery Dream Science & 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. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

Before you settle on your opinion, we've discovered 2 warning signs for Sichuan Discovery Dream Science & TechnologyLtd that you should be aware of.

If you're unsure about the strength of Sichuan Discovery Dream Science & 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.