Optimistic Investors Push Guangdong Zhengye Technology Co.,Ltd. (SZSE:300410) Shares Up 49% But Growth Is Lacking

The Guangdong Zhengye Technology Co.,Ltd. (SZSE:300410) share price has done very well over the last month, posting an excellent gain of 49%. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 14% in the last twelve months.

Even after such a large jump in price, it's still not a stretch to say that Guangdong Zhengye TechnologyLtd's price-to-sales (or "P/S") ratio of 3.6x right now seems quite "middle-of-the-road" compared to the Electronic industry in China, where the median P/S ratio is around 4x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for Guangdong Zhengye TechnologyLtd

What Does Guangdong Zhengye TechnologyLtd's Recent Performance Look Like?

For example, consider that Guangdong Zhengye TechnologyLtd's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

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

Do Revenue Forecasts Match The P/S Ratio?

In order to justify its P/S ratio, Guangdong Zhengye TechnologyLtd would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a frustrating 2.1% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 45% in total over the last three years. 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 26% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that Guangdong Zhengye TechnologyLtd is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

The Key Takeaway

Guangdong Zhengye TechnologyLtd appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in 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.

Our look at Guangdong Zhengye TechnologyLtd revealed its shrinking revenues over the medium-term haven't impacted the P/S as much as we anticipated, given the industry is set to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

You always need to take note of risks, for example - Guangdong Zhengye TechnologyLtd has 2 warning signs we think you should be aware of.

If you're unsure about the strength of Guangdong Zhengye TechnologyLtd'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.