Optimistic Investors Push Shenzhen Emperor Technology Co., Ltd. (SZSE:300546) Shares Up 37% But Growth Is Lacking

Shenzhen Emperor Technology Co., Ltd. (SZSE:300546) shareholders are no doubt pleased to see that the share price has bounced 37% in the last month, although it is still struggling to make up recently lost ground. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 43% in the last twelve months.

Although its price has surged higher, it's still not a stretch to say that Shenzhen Emperor Technology's price-to-sales (or "P/S") ratio of 4.3x right now seems quite "middle-of-the-road" compared to the Electronic industry in China, where the median P/S ratio is around 3.7x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Check out our latest analysis for Shenzhen Emperor Technology

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

For example, consider that Shenzhen Emperor Technology's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is moderate because investors think the company might still do enough to be in line with the broader industry in the near future. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Shenzhen Emperor Technology's earnings, revenue and cash flow.

Do Revenue Forecasts Match The P/S Ratio?

Shenzhen Emperor Technology's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 12%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 7.5% overall rise in revenue. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

This is in contrast to the rest of the industry, which is expected to grow by 25% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it interesting that Shenzhen Emperor Technology is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What Does Shenzhen Emperor Technology's P/S Mean For Investors?

Its shares have lifted substantially and now Shenzhen Emperor Technology's P/S is back within range of the industry median. 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.

We've established that Shenzhen Emperor Technology's average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. Right now we are uncomfortable with the P/S as this revenue performance isn't likely to support a more positive sentiment for long. Unless the recent medium-term conditions improve, it's hard to accept the current share price as fair value.

Having said that, be aware Shenzhen Emperor Technology is showing 2 warning signs in our investment analysis, and 1 of those is a bit concerning.

If you're unsure about the strength of Shenzhen Emperor 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.