Runa Smart Equipment Co., Ltd.'s (SZSE:301129) Stock Retreats 27% But Revenues Haven't Escaped The Attention Of Investors

Runa Smart Equipment Co., Ltd. (SZSE:301129) 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. The last month has meant the stock is now only up 8.7% during the last year.

Even after such a large drop in price, Runa Smart Equipment may still be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 8.7x, when you consider almost half of the companies in the Electronic industry in China have P/S ratios under 4.2x and even P/S lower than 2x aren't out of the ordinary. 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 Runa Smart Equipment

How Runa Smart Equipment Has Been Performing

While the industry has experienced revenue growth lately, Runa Smart Equipment's revenue has gone into reverse gear, which is not great. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on analyst estimates for the company? Then our free report on Runa Smart Equipment will help you uncover what's on the horizon.

How Is Runa Smart Equipment's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Runa Smart Equipment's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 47% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 20% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Shifting to the future, estimates from the only analyst covering the company suggest revenue should grow by 321% over the next year. That's shaping up to be materially higher than the 26% growth forecast for the broader industry.

In light of this, it's understandable that Runa Smart Equipment's P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Runa Smart Equipment's P/S?

Even after such a strong price drop, Runa Smart Equipment's P/S still exceeds the industry median significantly. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our look into Runa Smart Equipment shows that its P/S ratio remains high on the merit of its strong future revenues. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with Runa Smart Equipment (at least 1 which is significant), and understanding them should be part of your investment process.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.