Unfortunately for some shareholders, the Shenzhen Division Co.,Ltd. (SZSE:300167) share price has dived 29% in the last thirty days, prolonging recent pain. For any long-term shareholders, the last month ends a year to forget by locking in a 60% share price decline.

After such a large drop in price, Shenzhen DivisionLtd may look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 1.8x, considering almost half of all companies in the Communications industry in China have P/S ratios greater than 4x and even P/S higher than 7x 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.

How Shenzhen DivisionLtd Has Been Performing

As an illustration, revenue has deteriorated at Shenzhen DivisionLtd over the last year, which is not ideal at all. Perhaps the market believes the recent revenue performance isn't good enough to keep up the industry, causing the P/S ratio to suffer. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

Do Revenue Forecasts Match The Low P/S Ratio?

There's an inherent assumption that a company should far underperform the industry for P/S ratios like Shenzhen DivisionLtd's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 11% decrease to the company's top line. This has erased any of its gains during the last three years, with practically no change in revenue being achieved in total. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

Comparing that to the industry, which is predicted to deliver 44% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

In light of this, it's understandable that Shenzhen DivisionLtd's P/S sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Key Takeaway

Having almost fallen off a cliff, Shenzhen DivisionLtd's share price has pulled its P/S way down as well. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

In line with expectations, Shenzhen DivisionLtd maintains its low P/S on the weakness of its recent three-year growth being lower than the wider industry forecast. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Having said that, be aware Shenzhen DivisionLtd is showing 4 warning signs in our investment analysis, and 2 of those are a bit unpleasant.

If these risks are making you reconsider your opinion on Shenzhen DivisionLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.