What SDIC Zhonglu Fruit Juice Co.,Ltd.'s (SHSE:600962) 39% Share Price Gain Is Not Telling You

Simply Wall St · 10/14 22:09

The SDIC Zhonglu Fruit Juice Co.,Ltd. (SHSE:600962) share price has done very well over the last month, posting an excellent gain of 39%. The last 30 days bring the annual gain to a very sharp 49%.

Following the firm bounce in price, you could be forgiven for thinking SDIC Zhonglu Fruit JuiceLtd is a stock not worth researching with a price-to-sales ratios (or "P/S") of 2.7x, considering almost half the companies in China's Food industry have P/S ratios below 1.5x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

View our latest analysis for SDIC Zhonglu Fruit JuiceLtd

ps-multiple-vs-industry
SHSE:600962 Price to Sales Ratio vs Industry October 14th 2024

What Does SDIC Zhonglu Fruit JuiceLtd's Recent Performance Look Like?

For instance, SDIC Zhonglu Fruit JuiceLtd'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.

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

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should outperform the industry for P/S ratios like SDIC Zhonglu Fruit JuiceLtd'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 6.6%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 22% overall rise in revenue. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 16% shows it's noticeably less attractive.

In light of this, it's alarming that SDIC Zhonglu Fruit JuiceLtd's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

SDIC Zhonglu Fruit JuiceLtd shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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.

Our examination of SDIC Zhonglu Fruit JuiceLtd 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. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

Before you settle on your opinion, we've discovered 3 warning signs for SDIC Zhonglu Fruit JuiceLtd (2 are a bit unpleasant!) that you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.