Revenues Not Telling The Story For Zhejiang Shengyang Science and Technology Co.,Ltd. (SHSE:603703) After Shares Rise 27%

Despite an already strong run, Zhejiang Shengyang Science and Technology Co.,Ltd. (SHSE:603703) shares have been powering on, with a gain of 27% in the last thirty days. Notwithstanding the latest gain, the annual share price return of 3.6% isn't as impressive.

Following the firm bounce in price, Zhejiang Shengyang Science and TechnologyLtd's price-to-sales (or "P/S") ratio of 7.4x might make it look like a sell right now compared to the wider Communications industry in China, where around half of the companies have P/S ratios below 5.4x and even P/S below 2x are quite common. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Zhejiang Shengyang Science and TechnologyLtd

What Does Zhejiang Shengyang Science and TechnologyLtd's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Zhejiang Shengyang Science and TechnologyLtd over the last year, which is not ideal at all. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. However, if this isn't the case, investors might get caught out paying too much for the stock.

Although there are no analyst estimates available for Zhejiang Shengyang Science and TechnologyLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as high as Zhejiang Shengyang Science and TechnologyLtd's is when the company's growth is on track to outshine the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 4.6%. The last three years don't look nice either as the company has shrunk revenue by 24% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 39% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that Zhejiang Shengyang Science and TechnologyLtd is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Key Takeaway

Zhejiang Shengyang Science and TechnologyLtd's P/S is on the rise since its shares have risen strongly. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Zhejiang Shengyang Science and TechnologyLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you take the next step, you should know about the 2 warning signs for Zhejiang Shengyang Science and TechnologyLtd (1 is significant!) that we have uncovered.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.