Improved Revenues Required Before Shenzhen Zowee Technology Co., Ltd. (SZSE:002369) Stock's 32% Jump Looks Justified

Shenzhen Zowee Technology Co., Ltd. (SZSE:002369) shareholders would be excited to see that the share price has had a great month, posting a 32% gain and recovering from prior weakness. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 2.4% in the last twelve months.

Although its price has surged higher, Shenzhen Zowee Technology may still look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 1.7x, considering almost half of all companies in the Communications industry in China have P/S ratios greater than 3.9x and even P/S higher than 7x aren't out of the ordinary. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Shenzhen Zowee Technology

What Does Shenzhen Zowee Technology's Recent Performance Look Like?

For example, consider that Shenzhen Zowee Technology's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. Those who are bullish on Shenzhen Zowee Technology will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Shenzhen Zowee Technology will help you shine a light on its historical performance.

How Is Shenzhen Zowee Technology's Revenue Growth Trending?

There's an inherent assumption that a company should far underperform the industry for P/S ratios like Shenzhen Zowee Technology's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 11% decrease to the company's top line. As a result, revenue from three years ago have also fallen 45% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 46% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we are not surprised that Shenzhen Zowee Technology is trading at a P/S lower than the industry. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

The Bottom Line On Shenzhen Zowee Technology's P/S

Even after such a strong price move, Shenzhen Zowee Technology's P/S still trails the rest of the industry. 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.

It's no surprise that Shenzhen Zowee Technology maintains its low P/S off the back of its sliding revenue over the medium-term. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. If recent medium-term revenue trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

It is also worth noting that we have found 2 warning signs for Shenzhen Zowee Technology (1 shouldn't be ignored!) that you need to take into consideration.

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.