Guang Dong Sitong Group Co.,Ltd's (SHSE:603838) 34% Share Price Surge Not Quite Adding Up

Simply Wall St · 10/15 22:27

Guang Dong Sitong Group Co.,Ltd (SHSE:603838) shares have had a really impressive month, gaining 34% 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 14% over that time.

Since its price has surged higher, you could be forgiven for thinking Guang Dong Sitong GroupLtd is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 8.6x, considering almost half the companies in China's Consumer Durables industry have P/S ratios below 1.9x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

Check out our latest analysis for Guang Dong Sitong GroupLtd

ps-multiple-vs-industry
SHSE:603838 Price to Sales Ratio vs Industry October 15th 2024

What Does Guang Dong Sitong GroupLtd's P/S Mean For Shareholders?

Guang Dong Sitong GroupLtd has been doing a decent job lately as it's been growing revenue at a reasonable pace. One possibility is that the P/S ratio is high because investors think this good revenue growth will be enough to outperform the broader industry in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Guang Dong Sitong GroupLtd's earnings, revenue and cash flow.

What Are Revenue Growth Metrics Telling Us About The High P/S?

Guang Dong Sitong GroupLtd's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered a decent 3.5% gain to the company's revenues. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 48% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 9.3% 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 Guang Dong Sitong GroupLtd is trading at a P/S higher than the industry. 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 Guang Dong Sitong GroupLtd's P/S Mean For Investors?

The strong share price surge has lead to Guang Dong Sitong GroupLtd's P/S soaring as well. 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 Guang Dong Sitong GroupLtd 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. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Guang Dong Sitong GroupLtd, and understanding should be part of your investment process.

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.