Risks Still Elevated At These Prices As Youzan Technology Limited (HKG:8083) Shares Dive 31%

Youzan Technology Limited (HKG:8083) shareholders that were waiting for something to happen have been dealt a blow with a 31% share price drop in the last month. The last month has meant the stock is now only up 2.5% during the last year.

Although its price has dipped substantially, it's still not a stretch to say that Youzan Technology's price-to-sales (or "P/S") ratio of 1.8x right now seems quite "middle-of-the-road" compared to the Software industry in Hong Kong, where the median P/S ratio is around 2x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

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View our latest analysis for Youzan Technology

How Youzan Technology Has Been Performing

Youzan Technology could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. It might be that many expect the dour revenue performance to strengthen positively, which has kept the P/S from falling. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

How Is Youzan Technology's Revenue Growth Trending?

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

Retrospectively, the last year delivered virtually the same number to the company's top line as the year before. The lack of growth did nothing to help the company's aggregate three-year performance, which is an unsavory 8.1% drop in revenue. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 3.0% per annum as estimated by the sole analyst watching the company. With the industry predicted to deliver 37% growth per year, the company is positioned for a weaker revenue result.

With this in mind, we find it intriguing that Youzan Technology's P/S is closely matching its industry peers. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

What We Can Learn From Youzan Technology's P/S?

Youzan Technology's plummeting stock price has brought its P/S back to a similar region as the rest of the industry. 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 look at the analysts forecasts of Youzan Technology's revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. A positive change is needed in order to justify the current price-to-sales ratio.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Youzan Technology with six simple checks will allow you to discover any risks that could be an issue.

If you're unsure about the strength of Youzan 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.