Shenzhen Zesum Technology Co., Ltd.'s (SZSE:301486) 26% Price Boost Is Out Of Tune With Revenues

Shenzhen Zesum Technology Co., Ltd. (SZSE:301486) shares have continued their recent momentum with a 26% gain in the last month alone. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

Since its price has surged higher, Shenzhen Zesum Technology may be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 7.6x, since almost half of all companies in the Electronic industry in China have P/S ratios under 4.4x and even P/S lower than 2x are not unusual. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Shenzhen Zesum Technology

What Does Shenzhen Zesum Technology's Recent Performance Look Like?

With revenue growth that's superior to most other companies of late, Shenzhen Zesum Technology has been doing relatively well. The P/S is probably high because investors think this strong revenue performance will continue. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on analyst estimates for the company? Then our free report on Shenzhen Zesum Technology will help you uncover what's on the horizon.

Is There Enough Revenue Growth Forecasted For Shenzhen Zesum Technology?

The only time you'd be truly comfortable seeing a P/S as steep as Shenzhen Zesum Technology's is when the company's growth is on track to outshine the industry decidedly.

If we review the last year of revenue growth, the company posted a terrific increase of 64%. Pleasingly, revenue has also lifted 39% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 9.3% during the coming year according to the only analyst following the company. Meanwhile, the rest of the industry is forecast to expand by 27%, which is noticeably more attractive.

In light of this, it's alarming that Shenzhen Zesum Technology's P/S sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

The strong share price surge has lead to Shenzhen Zesum Technology's P/S soaring as well. 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.

It comes as a surprise to see Shenzhen Zesum Technology trade at such a high P/S given the revenue forecasts look less than stellar. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Shenzhen Zesum Technology (at least 1 which is significant), and understanding them should be part of your investment process.

If these risks are making you reconsider your opinion on Shenzhen Zesum Technology, 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.