The Sichuan Discovery Dream Science & Technology Co.,Ltd (SZSE:301213) share price has fared very poorly over the last month, falling by a substantial 28%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 26% share price drop.
In spite of the heavy fall in price, given around half the companies in China's Software industry have price-to-sales ratios (or "P/S") below 5x, you may still consider Sichuan Discovery Dream Science & TechnologyLtd as a stock to avoid entirely with its 22x P/S ratio. 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.
SZSE:301213 Price to Sales Ratio vs Industry January 31st 2024
How Has Sichuan Discovery Dream Science & TechnologyLtd Performed Recently?
For instance, Sichuan Discovery Dream Science & TechnologyLtd's receding revenue in recent times would have to be some food for thought. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. 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 Sichuan Discovery Dream Science & TechnologyLtd's earnings, revenue and cash flow.
Is There Enough Revenue Growth Forecasted For Sichuan Discovery Dream Science & TechnologyLtd?
In order to justify its P/S ratio, Sichuan Discovery Dream Science & TechnologyLtd 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 26%. The last three years don't look nice either as the company has shrunk revenue by 7.8% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.
Comparing that to the industry, which is predicted to deliver 35% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.
With this information, we find it concerning that Sichuan Discovery Dream Science & 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. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.
What We Can Learn From Sichuan Discovery Dream Science & TechnologyLtd's P/S?
Sichuan Discovery Dream Science & TechnologyLtd's shares may have suffered, but its P/S remains high. 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.
We've established that Sichuan Discovery Dream Science & TechnologyLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. 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 recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.
Before you settle on your opinion, we've discovered 3 warning signs for Sichuan Discovery Dream Science & TechnologyLtd (2 are potentially serious!) 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).
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