Optimistic Investors Push Niutech Environment Technology Corporation (SHSE:688309) Shares Up 33% But Growth Is Lacking

Simply Wall St · 10/18 22:39

Niutech Environment Technology Corporation (SHSE:688309) shareholders would be excited to see that the share price has had a great month, posting a 33% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 38% over that time.

Following the firm bounce in price, you could be forgiven for thinking Niutech Environment Technology is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 12.8x, considering almost half the companies in China's Commercial Services industry have P/S ratios below 2.7x. 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 Niutech Environment Technology

ps-multiple-vs-industry
SHSE:688309 Price to Sales Ratio vs Industry October 18th 2024

What Does Niutech Environment Technology's P/S Mean For Shareholders?

For example, consider that Niutech Environment Technology's financial performance has been poor lately as its revenue has been in decline. 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.

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 Niutech Environment Technology's earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

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

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 58%. This means it has also seen a slide in revenue over the longer-term as revenue is down 36% 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 29% shows it's an unpleasant look.

In light of this, it's alarming that Niutech Environment Technology'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.

What Does Niutech Environment Technology's P/S Mean For Investors?

Shares in Niutech Environment Technology 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.

Our examination of Niutech Environment Technology 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 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.

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

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).