Phoenix Shipping (Wuhan) Co., Ltd. (SZSE:000520) Shares May Have Slumped 26% But Getting In Cheap Is Still Unlikely

The Phoenix Shipping (Wuhan) Co., Ltd. (SZSE:000520) share price has softened a substantial 26% over the previous 30 days, handing back much of the gains the stock has made lately. Still, a bad month hasn't completely ruined the past year with the stock gaining 57%, which is great even in a bull market.

Even after such a large drop in price, you could still be forgiven for thinking Phoenix Shipping (Wuhan) is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 4.3x, considering almost half the companies in China's Shipping industry have P/S ratios below 2.1x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for Phoenix Shipping (Wuhan)

How Phoenix Shipping (Wuhan) Has Been Performing

For instance, Phoenix Shipping (Wuhan)'s receding revenue in recent times would have to be some food for thought. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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 Phoenix Shipping (Wuhan)'s earnings, revenue and cash flow.

What Are Revenue Growth Metrics Telling Us About The High P/S?

In order to justify its P/S ratio, Phoenix Shipping (Wuhan) would need to produce outstanding growth that's well in excess of the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 1.3%. Regardless, revenue has managed to lift by a handy 18% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 16% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that Phoenix Shipping (Wuhan)'s P/S sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Bottom Line On Phoenix Shipping (Wuhan)'s P/S

A significant share price dive has done very little to deflate Phoenix Shipping (Wuhan)'s very lofty P/S. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Phoenix Shipping (Wuhan) revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Phoenix Shipping (Wuhan), and understanding them should be part of your investment process.

If these risks are making you reconsider your opinion on Phoenix Shipping (Wuhan), 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.