Risks Still Elevated At These Prices As Shenzhen Chengtian Weiye Technology Co., Ltd. (SZSE:300689) Shares Dive 27%

Shenzhen Chengtian Weiye Technology Co., Ltd. (SZSE:300689) shareholders won't be pleased to see that the share price has had a very rough month, dropping 27% and undoing the prior period's positive performance. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 40% share price drop.

Even after such a large drop in price, you could still be forgiven for thinking Shenzhen Chengtian Weiye Technology is a stock not worth researching with a price-to-sales ratios (or "P/S") of 4.5x, considering almost half the companies in China's Tech industry have P/S ratios below 2.8x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Shenzhen Chengtian Weiye Technology

How Shenzhen Chengtian Weiye Technology Has Been Performing

For example, consider that Shenzhen Chengtian Weiye Technology's financial performance has been poor lately as its revenue has been in decline. 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. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

How Is Shenzhen Chengtian Weiye Technology's Revenue Growth Trending?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Shenzhen Chengtian Weiye Technology's to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 39%. This means it has also seen a slide in revenue over the longer-term as revenue is down 8.2% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 18% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we find it worrying that Shenzhen Chengtian Weiye Technology's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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 Shenzhen Chengtian Weiye Technology's P/S?

There's still some elevation in Shenzhen Chengtian Weiye Technology's P/S, even if the same can't be said for its share price recently. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Shenzhen Chengtian Weiye Technology 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. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

Before you settle on your opinion, we've discovered 4 warning signs for Shenzhen Chengtian Weiye Technology (2 don't sit too well with us!) that you should be aware of.

If you're unsure about the strength of Shenzhen Chengtian Weiye 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.

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