Zhejiang Zone-King Environmental Sci&Tech Co., Ltd. (SHSE:688701) Stock Rockets 33% As Investors Are Less Pessimistic Than Expected

Simply Wall St · 10/14 22:29

Zhejiang Zone-King Environmental Sci&Tech Co., Ltd. (SHSE:688701) shares have had a really impressive month, gaining 33% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 37% over that time.

Even after such a large jump in price, there still wouldn't be many who think Zhejiang Zone-King Environmental Sci&Tech's price-to-sales (or "P/S") ratio of 2.4x is worth a mention when the median P/S in China's Commercial Services industry is similar at about 2.6x. 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.

View our latest analysis for Zhejiang Zone-King Environmental Sci&Tech

ps-multiple-vs-industry
SHSE:688701 Price to Sales Ratio vs Industry October 14th 2024

What Does Zhejiang Zone-King Environmental Sci&Tech's P/S Mean For Shareholders?

Zhejiang Zone-King Environmental Sci&Tech has been doing a good job lately as it's been growing revenue at a solid pace. 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. If that doesn't eventuate, then existing shareholders probably aren't too pessimistic about the future direction of the share price.

Although there are no analyst estimates available for Zhejiang Zone-King Environmental Sci&Tech, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Do Revenue Forecasts Match The P/S Ratio?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Zhejiang Zone-King Environmental Sci&Tech's to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 16%. Still, revenue has fallen 24% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

In contrast to the company, the rest of the industry is expected to grow by 29% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that Zhejiang Zone-King Environmental Sci&Tech is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. 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 Zhejiang Zone-King Environmental Sci&Tech's P/S Mean For Investors?

Zhejiang Zone-King Environmental Sci&Tech appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

The fact that Zhejiang Zone-King Environmental Sci&Tech currently trades at a P/S on par with the rest of the industry is surprising to us since its recent revenues have been in decline over the medium-term, all while 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.

You should always think about risks. Case in point, we've spotted 2 warning signs for Zhejiang Zone-King Environmental Sci&Tech you should be aware of, and 1 of them doesn't sit too well with us.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.