SGSG Science&Technology Co., Ltd. Zhuhai's (SZSE:300561) 35% Price Boost Is Out Of Tune With Revenues

Those holding SGSG Science&Technology Co., Ltd. Zhuhai (SZSE:300561) shares would be relieved that the share price has rebounded 35% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 10% over that time.

Following the firm bounce in price, when almost half of the companies in China's Electronic industry have price-to-sales ratios (or "P/S") below 3.7x, you may consider SGSG Science&Technology Zhuhai as a stock not worth researching with its 21.5x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for SGSG Science&Technology Zhuhai

What Does SGSG Science&Technology Zhuhai's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at SGSG Science&Technology Zhuhai over the last year, which is not ideal at all. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

Is There Enough Revenue Growth Forecasted For SGSG Science&Technology Zhuhai?

SGSG Science&Technology Zhuhai's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered a frustrating 2.4% decrease to the company's top line. As a result, revenue from three years ago have also fallen 19% overall. 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 25% shows it's an unpleasant look.

In light of this, it's alarming that SGSG Science&Technology Zhuhai's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What We Can Learn From SGSG Science&Technology Zhuhai's P/S?

The strong share price surge has lead to SGSG Science&Technology Zhuhai's P/S soaring as well. 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 SGSG Science&Technology Zhuhai currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

Having said that, be aware SGSG Science&Technology Zhuhai is showing 1 warning sign in our investment analysis, you should know about.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.