There's No Escaping Shenzhen Ruihe Construction Decoration Co., Ltd.'s (SZSE:002620) Muted Revenues Despite A 27% Share Price Rise

Simply Wall St · 10/25 23:25

Shenzhen Ruihe Construction Decoration Co., Ltd. (SZSE:002620) shares have continued their recent momentum with a 27% gain in the last month alone. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 32% over that time.

Although its price has surged higher, Shenzhen Ruihe Construction Decoration may still look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 1.1x, considering almost half of all companies in the Professional Services industry in China have P/S ratios greater than 3.5x and even P/S higher than 9x aren't out of the ordinary. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Shenzhen Ruihe Construction Decoration

ps-multiple-vs-industry
SZSE:002620 Price to Sales Ratio vs Industry October 25th 2024

What Does Shenzhen Ruihe Construction Decoration's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Shenzhen Ruihe Construction Decoration over the last year, which is not ideal at all. One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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 Shenzhen Ruihe Construction Decoration's earnings, revenue and cash flow.

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

In order to justify its P/S ratio, Shenzhen Ruihe Construction Decoration would need to produce anemic growth that's substantially trailing the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 30%. The last three years don't look nice either as the company has shrunk revenue by 69% 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 33% shows it's an unpleasant look.

In light of this, it's understandable that Shenzhen Ruihe Construction Decoration's P/S would sit below the majority of other companies. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Bottom Line On Shenzhen Ruihe Construction Decoration's P/S

Even after such a strong price move, Shenzhen Ruihe Construction Decoration's P/S still trails the rest of the industry. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our examination of Shenzhen Ruihe Construction Decoration confirms that the company's shrinking revenue over the past medium-term is a key factor in its low price-to-sales ratio, given the industry is projected to grow. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Shenzhen Ruihe Construction Decoration, and understanding should be part of your investment process.

If you're unsure about the strength of Shenzhen Ruihe Construction Decoration's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.