Sunwave Communications Co.Ltd (SZSE:002115) shareholders that were waiting for something to happen have been dealt a blow with a 29% share price drop in the last month. Longer-term shareholders would now have taken a real hit with the stock declining 4.8% in the last year.
Although its price has dipped substantially, Sunwave CommunicationsLtd may still be sending very bullish signals at the moment with its price-to-sales (or "P/S") ratio of 0.3x, since almost half of all companies in the Media industry in China have P/S ratios greater than 2.4x and even P/S higher than 6x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.
SZSE:002115 Price to Sales Ratio vs Industry February 2nd 2024
What Does Sunwave CommunicationsLtd's P/S Mean For Shareholders?
With revenue growth that's superior to most other companies of late, Sunwave CommunicationsLtd has been doing relatively well. It might be that many expect the strong revenue performance to degrade substantially, which has repressed the share price, and thus the P/S ratio. 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.
Want the full picture on analyst estimates for the company? Then our free report on Sunwave CommunicationsLtd will help you uncover what's on the horizon.
What Are Revenue Growth Metrics Telling Us About The Low P/S?
There's an inherent assumption that a company should far underperform the industry for P/S ratios like Sunwave CommunicationsLtd's to be considered reasonable.
Retrospectively, the last year delivered an exceptional 29% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 55% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.
Looking ahead now, revenue is anticipated to climb by 13% during the coming year according to the only analyst following the company. Meanwhile, the rest of the industry is forecast to expand by 20%, which is noticeably more attractive.
In light of this, it's understandable that Sunwave CommunicationsLtd's P/S sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.
The Key Takeaway
Sunwave CommunicationsLtd's P/S looks about as weak as its stock price lately. 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.
We've established that Sunwave CommunicationsLtd maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Sunwave CommunicationsLtd that you should be aware of.
Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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