Shenzhen SDG Information Co., Ltd. (SZSE:000070) Looks Inexpensive After Falling 26% But Perhaps Not Attractive Enough

Shenzhen SDG Information Co., Ltd. (SZSE:000070) shareholders won't be pleased to see that the share price has had a very rough month, dropping 26% and undoing the prior period's positive performance. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 25% share price drop.

Following the heavy fall in price, Shenzhen SDG Information may 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 3.8x and even P/S higher than 7x 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.

View our latest analysis for Shenzhen SDG Information

How Shenzhen SDG Information Has Been Performing

Revenue has risen at a steady rate over the last year for Shenzhen SDG Information, which is generally not a bad outcome. Perhaps the market believes the recent revenue performance might fall short of industry figures in the near future, leading to a reduced P/S. If that doesn't eventuate, then existing shareholders may have reason to be optimistic about the future direction of the share price.

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

How Is Shenzhen SDG Information's Revenue Growth Trending?

Shenzhen SDG Information's P/S ratio would be typical for a company that's expected to deliver very poor growth or even falling revenue, and importantly, perform much worse than the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 6.5% last year. The latest three year period has also seen a 16% overall rise in revenue, aided somewhat by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 50% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in consideration, it's easy to understand why Shenzhen SDG Information's P/S falls short of the mark set by its industry peers. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

What We Can Learn From Shenzhen SDG Information's P/S?

Shares in Shenzhen SDG Information have plummeted and its P/S has followed suit. 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 we suspected, our examination of Shenzhen SDG Information revealed its three-year revenue trends are contributing to its low P/S, given they look worse than current industry expectations. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Having said that, be aware Shenzhen SDG Information is showing 4 warning signs in our investment analysis, and 3 of those don't sit too well with us.

If these risks are making you reconsider your opinion on Shenzhen SDG Information, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.