Shenzhen Huakong Seg Co., Ltd.'s (SZSE:000068) 28% Dip Still Leaving Some Shareholders Feeling Restless Over Its P/SRatio

Shenzhen Huakong Seg Co., Ltd. (SZSE:000068) shares have retraced a considerable 28% in the last month, reversing a fair amount of their solid recent performance. Longer-term shareholders will rue the drop in the share price, since it's now virtually flat for the year after a promising few quarters.

In spite of the heavy fall in price, when almost half of the companies in China's Electronic industry have price-to-sales ratios (or "P/S") below 3.6x, you may still consider Shenzhen Huakong Seg as a stock probably not worth researching with its 4.6x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

View our latest analysis for Shenzhen Huakong Seg

What Does Shenzhen Huakong Seg's P/S Mean For Shareholders?

For example, consider that Shenzhen Huakong Seg's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.

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 Shenzhen Huakong Seg's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Shenzhen Huakong Seg?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Shenzhen Huakong Seg's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 29% decrease to the company's top line. Still, the latest three year period has seen an excellent 230% overall rise in revenue, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 60% shows it's noticeably less attractive.

With this information, we find it concerning that Shenzhen Huakong Seg is trading at a P/S higher than the industry. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What Does Shenzhen Huakong Seg's P/S Mean For Investors?

Shenzhen Huakong Seg's P/S remain high even after its stock plunged. 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.

Our examination of Shenzhen Huakong Seg revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

Plus, you should also learn about these 3 warning signs we've spotted with Shenzhen Huakong Seg (including 2 which are a bit concerning).

If these risks are making you reconsider your opinion on Shenzhen Huakong Seg, 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.