There's Reason For Concern Over Shenzhen Coship Electronics Co., Ltd.'s (SZSE:002052) Massive 35% Price Jump

Simply Wall St · 10/14 22:10

Shenzhen Coship Electronics Co., Ltd. (SZSE:002052) shares have continued their recent momentum with a 35% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 36% in the last year.

Since its price has surged higher, Shenzhen Coship Electronics' price-to-sales (or "P/S") ratio of 11.7x might make it look like a strong sell right now compared to other companies in the Communications industry in China, where around half of the companies have P/S ratios below 4.4x and even P/S below 2x are quite common. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Shenzhen Coship Electronics

ps-multiple-vs-industry
SZSE:002052 Price to Sales Ratio vs Industry October 14th 2024

How Shenzhen Coship Electronics Has Been Performing

For instance, Shenzhen Coship Electronics' receding revenue in recent times would have to be some food for thought. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

How Is Shenzhen Coship Electronics' Revenue Growth Trending?

In order to justify its P/S ratio, Shenzhen Coship Electronics would need to produce outstanding growth that's well in excess of the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 53%. As a result, revenue from three years ago have also fallen 12% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 43% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we find it worrying that Shenzhen Coship Electronics' P/S exceeds that of its industry peers. 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. There's a very 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.

The Bottom Line On Shenzhen Coship Electronics' P/S

Shares in Shenzhen Coship Electronics have seen a strong upwards swing lately, which has really helped boost its P/S figure. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Shenzhen Coship Electronics currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Shenzhen Coship Electronics that you should be aware of.

If these risks are making you reconsider your opinion on Shenzhen Coship Electronics, explore our interactive list of high quality stocks to get an idea of what else is out there.