XDC Industries (Shenzhen) Limited's (SZSE:300615) Popularity With Investors Under Threat As Stock Sinks 29%

The XDC Industries (Shenzhen) Limited (SZSE:300615) share price has softened a substantial 29% over the previous 30 days, handing back much of the gains the stock has made lately. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 46% share price drop.

Although its price has dipped substantially, when almost half of the companies in China's Electronic industry have price-to-sales ratios (or "P/S") below 3.2x, you may still consider XDC Industries (Shenzhen) as a stock not worth researching with its 6.5x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

Check out our latest analysis for XDC Industries (Shenzhen)

What Does XDC Industries (Shenzhen)'s P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at XDC Industries (Shenzhen) over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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 XDC Industries (Shenzhen)'s earnings, revenue and cash flow.

How Is XDC Industries (Shenzhen)'s Revenue Growth Trending?

In order to justify its P/S ratio, XDC Industries (Shenzhen) would need to produce outstanding growth that's well in excess of the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 60%. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 17% in total. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Comparing that to the industry, which is predicted to deliver 29% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this in mind, we find it worrying that XDC Industries (Shenzhen)'s P/S exceeds that of its industry peers. 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. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What We Can Learn From XDC Industries (Shenzhen)'s P/S?

A significant share price dive has done very little to deflate XDC Industries (Shenzhen)'s very lofty 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.

The fact that XDC Industries (Shenzhen) currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You need to take note of risks, for example - XDC Industries (Shenzhen) has 2 warning signs (and 1 which can't be ignored) we think you should know about.

If you're unsure about the strength of XDC Industries (Shenzhen)'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.