Revenues Not Telling The Story For Nanjing TDH Technology Co.,Ltd. (SZSE:301378) After Shares Rise 35%

Nanjing TDH Technology Co.,Ltd. (SZSE:301378) shares have continued their recent momentum with a 35% gain in the last month alone. Unfortunately, despite the strong performance over the last month, the full year gain of 7.0% isn't as attractive.

Although its price has surged higher, there still wouldn't be many who think Nanjing TDH TechnologyLtd's price-to-sales (or "P/S") ratio of 7.1x is worth a mention when the median P/S in China's Software industry is similar at about 7.4x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

View our latest analysis for Nanjing TDH TechnologyLtd

How Has Nanjing TDH TechnologyLtd Performed Recently?

Revenue has risen at a steady rate over the last year for Nanjing TDH TechnologyLtd, which is generally not a bad outcome. Perhaps the expectation moving forward is that the revenue growth will track in line with the wider industry for the near term, which has kept the P/S subdued. Those who are bullish on Nanjing TDH TechnologyLtd will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

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

Is There Some Revenue Growth Forecasted For Nanjing TDH TechnologyLtd?

In order to justify its P/S ratio, Nanjing TDH TechnologyLtd would need to produce growth that's similar to the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 6.3% last year. Revenue has also lifted 15% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

This is in contrast to the rest of the industry, which is expected to grow by 33% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's curious that Nanjing TDH TechnologyLtd's P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Bottom Line On Nanjing TDH TechnologyLtd's P/S

Nanjing TDH TechnologyLtd appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in 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.

Our examination of Nanjing TDH TechnologyLtd revealed its poor three-year revenue trends aren't resulting in a lower P/S as per our expectations, given they look worse than current industry outlook. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. Unless the recent medium-term conditions improve, it's hard to accept the current share price as fair value.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 5 warning signs with Nanjing TDH TechnologyLtd (at least 4 which are potentially serious), and understanding them should be part of your investment process.

If you're unsure about the strength of Nanjing TDH 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.