Shenzhen Nanshan Power Co., Ltd.'s (SZSE:000037) Share Price Could Signal Some Risk

Simply Wall St · 10/15 22:07

When you see that almost half of the companies in the Electric Utilities industry in China have price-to-sales ratios (or "P/S") below 1.4x, Shenzhen Nanshan Power Co., Ltd. (SZSE:000037) looks to be giving off strong sell signals with its 9.6x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for Shenzhen Nanshan Power

ps-multiple-vs-industry
SZSE:000037 Price to Sales Ratio vs Industry October 15th 2024

How Has Shenzhen Nanshan Power Performed Recently?

As an illustration, revenue has deteriorated at Shenzhen Nanshan Power over the last year, which is not ideal at all. 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.

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

Is There Enough Revenue Growth Forecasted For Shenzhen Nanshan Power?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Shenzhen Nanshan Power's to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 31%. The last three years don't look nice either as the company has shrunk revenue by 40% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 8.0% shows it's an unpleasant look.

In light of this, it's alarming that Shenzhen Nanshan Power'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. 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 Final Word

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Shenzhen Nanshan Power 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. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You always need to take note of risks, for example - Shenzhen Nanshan Power has 1 warning sign we think 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.