There's Reason For Concern Over Shenzhen Zhilai Sci and Tech Co., Ltd.'s (SZSE:300771) Massive 34% Price Jump

Those holding Shenzhen Zhilai Sci and Tech Co., Ltd. (SZSE:300771) shares would be relieved that the share price has rebounded 34% 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 43% over that time.

Following the firm bounce in price, given close to half the companies operating in China's Electronic industry have price-to-sales ratios (or "P/S") below 3.7x, you may consider Shenzhen Zhilai Sci and Tech as a stock to potentially avoid with its 5.2x 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 as high as it is.

View our latest analysis for Shenzhen Zhilai Sci and Tech

What Does Shenzhen Zhilai Sci and Tech's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Shenzhen Zhilai Sci and Tech over the last year, which is not ideal at all. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

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 Zhilai Sci and Tech's earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

Shenzhen Zhilai Sci and Tech's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Retrospectively, the last year delivered a frustrating 67% decrease to the company's top line. As a result, revenue from three years ago have also fallen 64% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 25% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's alarming that Shenzhen Zhilai Sci and Tech'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. 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 Does Shenzhen Zhilai Sci and Tech's P/S Mean For Investors?

The large bounce in Shenzhen Zhilai Sci and Tech's shares has lifted the company's P/S handsomely. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Shenzhen Zhilai Sci and Tech revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. 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.

It is also worth noting that we have found 2 warning signs for Shenzhen Zhilai Sci and Tech (1 is a bit concerning!) that you need to take into consideration.

If these risks are making you reconsider your opinion on Shenzhen Zhilai Sci and Tech, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.