The ShenZhen RoadRover Technology Co.,Ltd (SZSE:002813) share price has fared very poorly over the last month, falling by a substantial 26%. To make matters worse, the recent drop has wiped out a year's worth of gains with the share price now back where it started a year ago.
Even after such a large drop in price, you could still be forgiven for thinking ShenZhen RoadRover TechnologyLtd is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 9.7x, considering almost half the companies in China's Auto Components industry have P/S ratios below 2.1x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.
SZSE:002813 Price to Sales Ratio vs Industry February 1st 2024
What Does ShenZhen RoadRover TechnologyLtd's P/S Mean For Shareholders?
For example, consider that ShenZhen RoadRover TechnologyLtd'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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Although there are no analyst estimates available for ShenZhen RoadRover TechnologyLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
Is There Enough Revenue Growth Forecasted For ShenZhen RoadRover TechnologyLtd?
There's an inherent assumption that a company should far outperform the industry for P/S ratios like ShenZhen RoadRover TechnologyLtd's to be considered reasonable.
In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 18%. This means it has also seen a slide in revenue over the longer-term as revenue is down 55% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.
Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 25% shows it's an unpleasant look.
With this information, we find it concerning that ShenZhen RoadRover TechnologyLtd is trading at a P/S higher than the industry. 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 ShenZhen RoadRover TechnologyLtd's P/S Mean For Investors?
Even after such a strong price drop, ShenZhen RoadRover TechnologyLtd's P/S still exceeds the industry median significantly. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.
We've established that ShenZhen RoadRover TechnologyLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. 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.
The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for ShenZhen RoadRover TechnologyLtd with six simple checks.
If you're unsure about the strength of ShenZhen RoadRover TechnologyLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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