Why Investors Shouldn't Be Surprised By Nanjing Putian Telecommunications Co., Ltd.'s (SZSE:200468) 31% Share Price Plunge

The Nanjing Putian Telecommunications Co., Ltd. (SZSE:200468) share price has fared very poorly over the last month, falling by a substantial 31%. For any long-term shareholders, the last month ends a year to forget by locking in a 50% share price decline.

Since its price has dipped substantially, Nanjing Putian Telecommunications' price-to-sales (or "P/S") ratio of 0.4x might make it look like a strong buy right now compared to the wider Communications industry in China, where around half of the companies have P/S ratios above 4x and even P/S above 7x are quite common. 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 Nanjing Putian Telecommunications

How Nanjing Putian Telecommunications Has Been Performing

For example, consider that Nanjing Putian Telecommunications' financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

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

How Is Nanjing Putian Telecommunications' Revenue Growth Trending?

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

Retrospectively, the last year delivered a frustrating 7.4% decrease to the company's top line. As a result, revenue from three years ago have also fallen 26% overall. 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 45% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we understand why Nanjing Putian Telecommunications' P/S is lower than most of its industry peers. 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 Key Takeaway

Nanjing Putian Telecommunications' P/S looks about as weak as its stock price lately. 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.

It's no surprise that Nanjing Putian Telecommunications 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.

Plus, you should also learn about these 3 warning signs we've spotted with Nanjing Putian Telecommunications (including 1 which can't be ignored).

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.