Zhongshen Jianye Holding Limited's (HKG:2503) 30% Share Price Plunge Could Signal Some Risk

The Zhongshen Jianye Holding Limited (HKG:2503) share price has softened a substantial 30% over the previous 30 days, handing back much of the gains the stock has made lately. The last month has meant the stock is now only up 6.2% during the last year.

In spite of the heavy fall in price, there still wouldn't be many who think Zhongshen Jianye Holding's price-to-sales (or "P/S") ratio of 0.7x is worth a mention when the median P/S in Hong Kong's Construction industry is similar at about 0.3x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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See our latest analysis for Zhongshen Jianye Holding

How Has Zhongshen Jianye Holding Performed Recently?

As an illustration, revenue has deteriorated at Zhongshen Jianye Holding over the last year, which is not ideal at all. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Zhongshen Jianye Holding will help you shine a light on its historical performance.

Is There Some Revenue Growth Forecasted For Zhongshen Jianye Holding?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Zhongshen Jianye Holding's to be considered reasonable.

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 51%. As a result, revenue from three years ago have also fallen 44% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 6.5% 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 Zhongshen Jianye Holding's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate 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 the recent negative growth rates.

What Does Zhongshen Jianye Holding's P/S Mean For Investors?

With its share price dropping off a cliff, the P/S for Zhongshen Jianye Holding looks to be in line with the rest of the Construction industry. 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 at Zhongshen Jianye Holding revealed its shrinking revenues over the medium-term haven't impacted the P/S as much as we anticipated, given the industry is set to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

It is also worth noting that we have found 5 warning signs for Zhongshen Jianye Holding (1 can't be ignored!) that you need to take into consideration.

If these risks are making you reconsider your opinion on Zhongshen Jianye Holding, 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.