Zhibao Technology Inc. (NASDAQ:ZBAO) Stock's 31% Dive Might Signal An Opportunity But It Requires Some Scrutiny

To the annoyance of some shareholders, Zhibao Technology Inc. (NASDAQ:ZBAO) shares are down a considerable 31% in the last month, which continues a horrid run for the company. For any long-term shareholders, the last month ends a year to forget by locking in a 72% share price decline.

Even after such a large drop in price, it's still not a stretch to say that Zhibao Technology's price-to-sales (or "P/S") ratio of 1.2x right now seems quite "middle-of-the-road" compared to the Insurance industry in the United States, where the median P/S ratio is around 1.1x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

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View our latest analysis for Zhibao Technology

How Zhibao Technology Has Been Performing

Revenue has risen firmly for Zhibao Technology recently, which is pleasing to see. Perhaps the market is expecting future revenue performance to only keep up with the broader industry, which has keeping the P/S in line with expectations. Those who are bullish on Zhibao Technology will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Although there are no analyst estimates available for Zhibao Technology, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Some Revenue Growth Forecasted For Zhibao Technology?

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

Retrospectively, the last year delivered an exceptional 29% gain to the company's top line. This great performance means it was also able to deliver immense revenue growth over the last three years. Accordingly, shareholders would have been over the moon with those medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 4.9% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's curious that Zhibao Technology's P/S sits in line with the majority of other companies. Apparently some shareholders believe the recent performance is at its limits and have been accepting lower selling prices.

The Key Takeaway

With its share price dropping off a cliff, the P/S for Zhibao Technology looks to be in line with the rest of the Insurance industry. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We didn't quite envision Zhibao Technology's P/S sitting in line with the wider industry, considering the revenue growth over the last three-year is higher than the current industry outlook. When we see strong revenue with faster-than-industry growth, we can only assume potential risks are what might be placing pressure on the P/S ratio. While recent revenue trends over the past medium-term suggest that the risk of a price decline is low, investors appear to see the likelihood of revenue fluctuations in the future.

You should always think about risks. Case in point, we've spotted 4 warning signs for Zhibao Technology you should be aware of, and 2 of them are a bit unpleasant.

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.