Optimistic Investors Push GuangDong GenSho Logistics Co.,LTD (SHSE:603813) Shares Up 32% But Growth Is Lacking

GuangDong GenSho Logistics Co.,LTD (SHSE:603813) shares have had a really impressive month, gaining 32% after a shaky period beforehand. Taking a wider view, although not as strong as the last month, the full year gain of 21% is also fairly reasonable.

After such a large jump in price, GuangDong GenSho LogisticsLTD may be sending bearish signals at the moment with its price-to-sales (or "P/S") ratio of 4.6x, since almost half of all companies in the Transportation in China have P/S ratios under 3.7x and even P/S lower than 1.7x are not unusual. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for GuangDong GenSho LogisticsLTD

How GuangDong GenSho LogisticsLTD Has Been Performing

For example, consider that GuangDong GenSho LogisticsLTD's financial performance has been poor lately as its revenue has been in decline. 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. If not, then existing shareholders may be quite nervous about the viability of the share price.

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 GuangDong GenSho LogisticsLTD's earnings, revenue and cash flow.

How Is GuangDong GenSho LogisticsLTD's Revenue Growth Trending?

There's an inherent assumption that a company should outperform the industry for P/S ratios like GuangDong GenSho LogisticsLTD'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 26%. The last three years don't look nice either as the company has shrunk revenue by 26% in aggregate. 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 5.4% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that GuangDong GenSho LogisticsLTD'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 Does GuangDong GenSho LogisticsLTD's P/S Mean For Investors?

The large bounce in GuangDong GenSho LogisticsLTD's shares has lifted the company's P/S handsomely. 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.

We've established that GuangDong GenSho LogisticsLTD 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 recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

We don't want to rain on the parade too much, but we did also find 3 warning signs for GuangDong GenSho LogisticsLTD (2 are significant!) that you need to be mindful of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.