Hunan Copote Science Technology Co.,Ltd. (SHSE:600476) shareholders won't be pleased to see that the share price has had a very rough month, dropping 28% and undoing the prior period's positive performance. The recent drop has obliterated the annual return, with the share price now down 4.4% over that longer period.

Although its price has dipped substantially, there still wouldn't be many who think Hunan Copote Science TechnologyLtd's price-to-sales (or "P/S") ratio of 4.9x is worth a mention when the median P/S in China's IT industry is similar at about 4.2x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for Hunan Copote Science TechnologyLtd

How Has Hunan Copote Science TechnologyLtd Performed Recently?

For instance, Hunan Copote Science TechnologyLtd's receding revenue in recent times would have to be some food for thought. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, 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.

Do Revenue Forecasts Match The P/S Ratio?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Hunan Copote Science TechnologyLtd's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 20% decrease to the company's top line. Even so, admirably revenue has lifted 136% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

This is in contrast to the rest of the industry, which is expected to grow by 49% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it interesting that Hunan Copote Science TechnologyLtd is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

What We Can Learn From Hunan Copote Science TechnologyLtd's P/S?

With its share price dropping off a cliff, the P/S for Hunan Copote Science TechnologyLtd looks to be in line with the rest of the IT 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.

Our examination of Hunan Copote Science TechnologyLtd revealed its poor three-year revenue trends aren't resulting in a lower P/S as per our expectations, given they look worse than current industry outlook. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Hunan Copote Science TechnologyLtd, and understanding these should be part of your investment process.

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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