Eastern Communications Co.,Ltd.'s (SHSE:600776) 28% Share Price Surge Not Quite Adding Up

Eastern Communications Co.,Ltd. (SHSE:600776) shares have had a really impressive month, gaining 28% after a shaky period beforehand. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 6.2% in the last twelve months.

In spite of the firm bounce in price, it's still not a stretch to say that Eastern CommunicationsLtd's price-to-sales (or "P/S") ratio of 4.7x right now seems quite "middle-of-the-road" compared to the Communications industry in China, where the median P/S ratio is around 4.2x. 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.

See our latest analysis for Eastern CommunicationsLtd

What Does Eastern CommunicationsLtd's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Eastern CommunicationsLtd over the last year, which is not ideal at all. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

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 Eastern CommunicationsLtd's earnings, revenue and cash flow.

Is There Some Revenue Growth Forecasted For Eastern CommunicationsLtd?

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

Retrospectively, the last year delivered a frustrating 5.2% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 4.6% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 42% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this information, we find it concerning that Eastern CommunicationsLtd is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

The Bottom Line On Eastern CommunicationsLtd's P/S

Its shares have lifted substantially and now Eastern CommunicationsLtd's P/S is back within range of 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.

The fact that Eastern CommunicationsLtd currently trades at a P/S on par with the rest of the industry is surprising to us since its recent revenues have been in decline over the medium-term, all while the industry is set to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. 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.

Plus, you should also learn about this 1 warning sign we've spotted with Eastern CommunicationsLtd.

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.