Shenzhen Zowee Technology Co., Ltd.'s (SZSE:002369) Prospects Need A Boost To Lift Shares

You may think that with a price-to-sales (or "P/S") ratio of 1.4x Shenzhen Zowee Technology Co., Ltd. (SZSE:002369) is definitely a stock worth checking out, seeing as almost half of all the Communications companies in China have P/S ratios greater than 4.3x and even P/S above 8x aren't out of the ordinary. 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 Zowee Technology

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

It looks like revenue growth has deserted Shenzhen Zowee Technology recently, which is not something to boast about. One possibility is that the P/S is low because investors think this benign revenue growth rate will likely underperform the broader industry in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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.

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. Whilst it's an improvement, it wasn't enough to get the company out of the hole it was in, with revenue down 45% overall from three years ago. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 50% shows it's an unpleasant look.

With this in mind, we understand why Shenzhen Zowee Technology's P/S is lower than most of its industry peers. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

What We Can Learn From Shenzhen Zowee Technology's P/S?

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 Zowee Technology confirms that the company's shrinking revenue over the past medium-term is a key factor in its low price-to-sales ratio, given the industry is projected to grow. 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 makes us a bit uncomfortable!) that you need to take into consideration.

If you're unsure about the strength of Shenzhen Zowee Technology's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.