Some Shareholders Feeling Restless Over Elec-Tech International Co., Ltd.'s (SZSE:002005) P/S Ratio

Simply Wall St · 10/15 22:10

When you see that almost half of the companies in the Consumer Durables industry in China have price-to-sales ratios (or "P/S") below 1.9x, Elec-Tech International Co., Ltd. (SZSE:002005) looks to be giving off some sell signals with its 2.9x P/S ratio. 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.

Check out our latest analysis for Elec-Tech International

ps-multiple-vs-industry
SZSE:002005 Price to Sales Ratio vs Industry October 15th 2024

What Does Elec-Tech International's Recent Performance Look Like?

For instance, Elec-Tech International's receding revenue in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

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

How Is Elec-Tech International's Revenue Growth Trending?

Elec-Tech International's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 13%. This means it has also seen a slide in revenue over the longer-term as revenue is down 68% in total over the last three years. 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 9.3% shows it's an unpleasant look.

With this in mind, we find it worrying that Elec-Tech International's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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.

What Does Elec-Tech International's P/S Mean For Investors?

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Elec-Tech International revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. 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. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Elec-Tech International you should know about.

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).