Even With A 32% Surge, Cautious Investors Are Not Rewarding Shenzhen Investment Limited's (HKG:604) Performance Completely

The Shenzhen Investment Limited (HKG:604) share price has done very well over the last month, posting an excellent gain of 32%. Unfortunately, despite the strong performance over the last month, the full year gain of 5.3% isn't as attractive.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about Shenzhen Investment's P/S ratio of 0.6x, since the median price-to-sales (or "P/S") ratio for the Real Estate industry in Hong Kong is also close to 0.7x. 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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View our latest analysis for Shenzhen Investment

What Does Shenzhen Investment's P/S Mean For Shareholders?

The recently shrinking revenue for Shenzhen Investment has been in line with the industry. It seems that few are expecting the company's revenue performance to deviate much from most other companies, which has held the P/S back. You'd much rather the company improve its revenue if you still believe in the business. In saying that, existing shareholders probably aren't too pessimistic about the share price if the company's revenue continues tracking the industry.

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How Is Shenzhen Investment's Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like Shenzhen Investment's is when the company's growth is tracking the industry closely.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 1.7%. This means it has also seen a slide in revenue over the longer-term as revenue is down 51% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 7.8% each year as estimated by the two analysts watching the company. That's shaping up to be materially higher than the 3.6% per year growth forecast for the broader industry.

With this in consideration, we find it intriguing that Shenzhen Investment's P/S is closely matching its industry peers. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Final Word

Shenzhen Investment's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Despite enticing revenue growth figures that outpace the industry, Shenzhen Investment's P/S isn't quite what we'd expect. When we see a strong revenue outlook, with growth outpacing the industry, we can only assume potential uncertainty around these figures are what might be placing slight pressure on the P/S ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future revenue could see some volatility.

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

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