When you see that almost half of the companies in the Real Estate industry in China have price-to-sales ratios (or "P/S") below 1.7x, Shenzhen Special Economic Zone Real Estate & Properties (Group) Co., Ltd. (SZSE:000029) looks to be giving off strong sell signals with its 24.3x 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.

What Does Shenzhen Special Economic Zone Real Estate & Properties (Group)'s P/S Mean For Shareholders?

For instance, Shenzhen Special Economic Zone Real Estate & Properties (Group)'s receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is Shenzhen Special Economic Zone Real Estate & Properties (Group)'s Revenue Growth Trending?

In order to justify its P/S ratio, Shenzhen Special Economic Zone Real Estate & Properties (Group) 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 47%. As a result, revenue from three years ago have also fallen 75% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 9.0% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's alarming that Shenzhen Special Economic Zone Real Estate & Properties (Group)'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. 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 Does Shenzhen Special Economic Zone Real Estate & Properties (Group)'s P/S Mean For Investors?

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.

Our examination of Shenzhen Special Economic Zone Real Estate & Properties (Group) revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. 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 recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

You always need to take note of risks, for example - Shenzhen Special Economic Zone Real Estate & Properties (Group) has 1 warning sign we think 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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