Revenues Not Telling The Story For Shenzhen EXC-LED Technology Co.Ltd (SZSE:300889) After Shares Rise 34%

Simply Wall St · 10/18 23:05

Shenzhen EXC-LED Technology Co.Ltd (SZSE:300889) shares have continued their recent momentum with a 34% gain in the last month alone. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 4.9% in the last twelve months.

Even after such a large jump in price, there still wouldn't be many who think Shenzhen EXC-LED TechnologyLtd's price-to-sales (or "P/S") ratio of 2.1x is worth a mention when the median P/S in China's Electrical industry is similar at about 2.2x. 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.

Check out our latest analysis for Shenzhen EXC-LED TechnologyLtd

ps-multiple-vs-industry
SZSE:300889 Price to Sales Ratio vs Industry October 18th 2024

How Has Shenzhen EXC-LED TechnologyLtd Performed Recently?

Revenue has risen firmly for Shenzhen EXC-LED TechnologyLtd recently, which is pleasing to see. One possibility is that the P/S is moderate because investors think this respectable revenue growth might not be enough to outperform the broader industry in the near future. Those who are bullish on Shenzhen EXC-LED TechnologyLtd will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Although there are no analyst estimates available for Shenzhen EXC-LED TechnologyLtd, 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?

The only time you'd be comfortable seeing a P/S like Shenzhen EXC-LED TechnologyLtd's is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered a decent 8.0% gain to the company's revenues. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 11% 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 23% 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 Shenzhen EXC-LED TechnologyLtd 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. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

What We Can Learn From Shenzhen EXC-LED TechnologyLtd's P/S?

Its shares have lifted substantially and now Shenzhen EXC-LED TechnologyLtd's P/S is back within range of the industry median. 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 Shenzhen EXC-LED TechnologyLtd 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 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 is also worth noting that we have found 1 warning sign for Shenzhen EXC-LED TechnologyLtd that you need to take into consideration.

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).