There's No Escaping Jiangsu Etern Company Limited's (SHSE:600105) Muted Revenues Despite A 29% Share Price Rise

Jiangsu Etern Company Limited (SHSE:600105) shares have continued their recent momentum with a 29% gain in the last month alone. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 12% over that time.

Although its price has surged higher, Jiangsu Etern may still be sending very bullish signals at the moment with its price-to-sales (or "P/S") ratio of 1.7x, since almost half of all companies in the Communications industry in China have P/S ratios greater than 5.7x and even P/S higher than 10x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

Check out our latest analysis for Jiangsu Etern

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

With revenue growth that's inferior to most other companies of late, Jiangsu Etern has been relatively sluggish. Perhaps the market is expecting the current trend of poor revenue growth to continue, which has kept the P/S suppressed. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Keen to find out how analysts think Jiangsu Etern's future stacks up against the industry? In that case, our free report is a great place to start.

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 Jiangsu Etern's to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 7.1% last year. The latest three year period has also seen a 13% overall rise in revenue, aided somewhat by its short-term performance. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Turning to the outlook, the next year should generate growth of 26% as estimated by the dual analysts watching the company. With the industry predicted to deliver 40% growth, the company is positioned for a weaker revenue result.

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

The Final Word

Jiangsu Etern's recent share price jump still sees fails to bring its P/S alongside the industry median. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Jiangsu Etern maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 4 warning signs for Jiangsu Etern (of which 2 don't sit too well with us!) you should know about.

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.