Tus-Design Group Co., Ltd. (SZSE:300500) shares have had a horrible month, losing 27% after a relatively good period beforehand. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 33% share price drop.
Since its price has dipped substantially, Tus-Design Group may 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 3.6x and even P/S higher than 8x 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.
What Does Tus-Design Group's P/S Mean For Shareholders?
For example, consider that Tus-Design Group's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.
Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Tus-Design Group will help you shine a light on its historical performance.
How Is Tus-Design Group's Revenue Growth Trending?
There's an inherent assumption that a company should far underperform the industry for P/S ratios like Tus-Design Group's to be considered reasonable.
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 12%. This means it has also seen a slide in revenue over the longer-term as revenue is down 28% 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.
In light of this, it's understandable that Tus-Design Group'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. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.
What We Can Learn From Tus-Design Group's P/S?
Shares in Tus-Design Group have plummeted and its P/S has followed suit. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
As we suspected, our examination of Tus-Design Group revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Given the current circumstances, it seems unlikely that the share price will experience any significant movement in either direction in the near future if recent medium-term revenue trends persist.
You should always think about risks. Case in point, we've spotted 2 warning signs for Tus-Design Group you should be aware of, and 1 of them is concerning.
If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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