Improved Revenues Required Before Shenzhen Gongjin Electronics Co., Ltd. (SHSE:603118) Stock's 45% Jump Looks Justified

Despite an already strong run, Shenzhen Gongjin Electronics Co., Ltd. (SHSE:603118) shares have been powering on, with a gain of 45% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 72% in the last year.

In spite of the firm bounce in price, Shenzhen Gongjin Electronics may still be sending very bullish signals at the moment with its price-to-sales (or "P/S") ratio of 1.3x, 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.

See our latest analysis for Shenzhen Gongjin Electronics

How Shenzhen Gongjin Electronics Has Been Performing

Shenzhen Gongjin Electronics hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. It seems that many are expecting the poor revenue performance to persist, which has repressed the P/S ratio. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.

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

How Is Shenzhen Gongjin Electronics' Revenue Growth Trending?

In order to justify its P/S ratio, Shenzhen Gongjin Electronics would need to produce anemic growth that's substantially trailing the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 17%. As a result, revenue from three years ago have also fallen 24% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 12% during the coming year according to the only analyst following the company. With the industry predicted to deliver 33% growth, the company is positioned for a weaker revenue result.

In light of this, it's understandable that Shenzhen Gongjin Electronics' P/S sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What Does Shenzhen Gongjin Electronics' P/S Mean For Investors?

Shenzhen Gongjin Electronics' 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.

As expected, our analysis of Shenzhen Gongjin Electronics' analyst forecasts confirms that the company's underwhelming revenue outlook is a major contributor to its low P/S. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Shenzhen Gongjin Electronics (at least 1 which can't be ignored), and understanding these should be part of your investment process.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.