Shenzhen Xinyichang Technology Co., Ltd. (SHSE:688383) shares have had a horrible month, losing 25% after a relatively good period beforehand. For any long-term shareholders, the last month ends a year to forget by locking in a 65% share price decline.

Even after such a large drop in price, you could still be forgiven for feeling indifferent about Shenzhen Xinyichang Technology's P/S ratio of 5.1x, since the median price-to-sales (or "P/S") ratio for the Semiconductor industry in China is also close to 5.9x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

How Has Shenzhen Xinyichang Technology Performed Recently?

Shenzhen Xinyichang Technology hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. It might be that many expect the dour revenue performance to strengthen positively, which has kept the P/S from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

How Is Shenzhen Xinyichang Technology's Revenue Growth Trending?

In order to justify its P/S ratio, Shenzhen Xinyichang Technology would need to produce growth that's similar to the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 21%. Regardless, revenue has managed to lift by a handy 27% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Looking ahead now, revenue is anticipated to climb by 50% during the coming year according to the three analysts following the company. That's shaping up to be materially higher than the 35% growth forecast for the broader industry.

With this in consideration, we find it intriguing that Shenzhen Xinyichang Technology's P/S is closely matching its industry peers. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Key Takeaway

With its share price dropping off a cliff, the P/S for Shenzhen Xinyichang Technology looks to be in line with the rest of the Semiconductor industry. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Shenzhen Xinyichang Technology currently trades on a lower than expected P/S since its forecasted revenue growth is higher than the wider industry. When we see a strong revenue outlook, with growth outpacing the industry, we can only assume potential uncertainty around these figures are what might be placing slight pressure on the P/S ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future revenue could see some volatility.

There are also other vital risk factors to consider and we've discovered 4 warning signs for Shenzhen Xinyichang Technology (1 can't be ignored!) that you should be aware of before investing here.

If you're unsure about the strength of Shenzhen Xinyichang Technology'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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com