Jiangsu Etern Company Limited (SHSE:600105) Stock Catapults 25% Though Its Price And Business Still Lag The Industry

Jiangsu Etern Company Limited (SHSE:600105) shareholders would be excited to see that the share price has had a great month, posting a 25% gain and recovering from prior weakness. Taking a wider view, although not as strong as the last month, the full year gain of 23% is also fairly reasonable.

In spite of the firm bounce in price, Jiangsu Etern may still look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 2.1x, considering almost half of all companies in the Communications industry in China have P/S ratios greater than 5.8x and even P/S higher than 10x aren't out of the ordinary. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Jiangsu Etern

What Does Jiangsu Etern's P/S Mean For Shareholders?

Recent times haven't been great for Jiangsu Etern as its revenue has been rising slower than most other companies. The P/S ratio is probably low because investors think this lacklustre revenue performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Jiangsu Etern.

Is There Any Revenue Growth Forecasted For Jiangsu Etern?

The only time you'd be truly comfortable seeing a P/S as depressed as Jiangsu Etern's is when the company's growth is on track to lag the industry decidedly.

Retrospectively, the last year delivered a decent 7.1% gain to the company's revenues. Revenue has also lifted 13% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 26% during the coming year according to the dual analysts following the company. That's shaping up to be materially lower than the 31% growth forecast for the broader industry.

In light of this, it's understandable that Jiangsu Etern's P/S sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What Does Jiangsu Etern's P/S Mean For Investors?

Even after such a strong price move, Jiangsu Etern's P/S still trails 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.

As we suspected, our examination of Jiangsu Etern's analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. The company will need a change of fortune to justify the P/S rising higher in the future.

Before you take the next step, you should know about the 5 warning signs for Jiangsu Etern (2 are potentially serious!) that we have uncovered.

If these risks are making you reconsider your opinion on Jiangsu Etern, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.