Renrenle Commercial Group Co.,Ltd. (SZSE:002336) shareholders are no doubt pleased to see that the share price has bounced 51% in the last month, although it is still struggling to make up recently lost ground. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 33% over that time.
Following the firm bounce in price, you could be forgiven for thinking Renrenle Commercial GroupLtd is a stock not worth researching with a price-to-sales ratios (or "P/S") of 1.4x, considering almost half the companies in China's Consumer Retailing industry have P/S ratios below 0.9x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.
SZSE:002336 Price to Sales Ratio vs Industry March 7th 2024
How Renrenle Commercial GroupLtd Has Been Performing
For instance, Renrenle Commercial GroupLtd'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.
Although there are no analyst estimates available for Renrenle Commercial GroupLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
What Are Revenue Growth Metrics Telling Us About The High P/S?
There's an inherent assumption that a company should outperform the industry for P/S ratios like Renrenle Commercial GroupLtd'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 26%. The last three years don't look nice either as the company has shrunk revenue by 48% 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 16% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.
In light of this, it's alarming that Renrenle Commercial GroupLtd's P/S sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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.
The Bottom Line On Renrenle Commercial GroupLtd's P/S
Renrenle Commercial GroupLtd shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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 Renrenle Commercial GroupLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. 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.
Before you settle on your opinion, we've discovered 3 warning signs for Renrenle Commercial GroupLtd 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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