Guangzhou Devotion Thermal Technology Co., Ltd.'s (SZSE:300335) Price Is Right But Growth Is Lacking After Shares Rocket 33%

Guangzhou Devotion Thermal Technology Co., Ltd. (SZSE:300335) shareholders are no doubt pleased to see that the share price has bounced 33% in the last month, although it is still struggling to make up recently lost ground. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 14% over that time.

Even after such a large jump in price, Guangzhou Devotion Thermal Technology may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 1.6x, since almost half of all companies in the Renewable Energy industry in China have P/S ratios greater than 2.2x and even P/S higher than 5x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

See our latest analysis for Guangzhou Devotion Thermal Technology

How Has Guangzhou Devotion Thermal Technology Performed Recently?

The revenue growth achieved at Guangzhou Devotion Thermal Technology over the last year would be more than acceptable for most companies. Perhaps the market is expecting this acceptable revenue performance to take a dive, which has kept the P/S suppressed. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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 Guangzhou Devotion Thermal Technology's earnings, revenue and cash flow.

Is There Any Revenue Growth Forecasted For Guangzhou Devotion Thermal Technology?

The only time you'd be truly comfortable seeing a P/S as low as Guangzhou Devotion Thermal Technology's is when the company's growth is on track to lag the industry.

Retrospectively, the last year delivered an exceptional 18% gain to the company's top line. However, this wasn't enough as the latest three year period has seen the company endure a nasty 9.1% drop in revenue in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

In contrast to the company, the rest of the industry is expected to grow by 12,130% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we are not surprised that Guangzhou Devotion Thermal Technology is trading at a P/S lower than the industry. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Final Word

The latest share price surge wasn't enough to lift Guangzhou Devotion Thermal Technology's P/S close to the industry median. 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.

It's no surprise that Guangzhou Devotion Thermal Technology maintains its low P/S off the back of its sliding revenue over the medium-term. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. If recent medium-term revenue trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 3 warning signs for Guangzhou Devotion Thermal Technology you should be aware of, and 1 of them is a bit concerning.

If these risks are making you reconsider your opinion on Guangzhou Devotion Thermal 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.