Guangzhou S.P.I Design Co., Ltd. (SZSE:300844) shareholders that were waiting for something to happen have been dealt a blow with a 28% share price drop in the last month. The recent drop has obliterated the annual return, with the share price now down 3.6% over that longer period.

Although its price has dipped substantially, given around half the companies in China's Commercial Services industry have price-to-sales ratios (or "P/S") below 2.7x, you may still consider Guangzhou S.P.I Design as a stock to avoid entirely with its 5x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

What Does Guangzhou S.P.I Design's Recent Performance Look Like?

For instance, Guangzhou S.P.I Design'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.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Guangzhou S.P.I Design's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 23% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 35% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 30% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that Guangzhou S.P.I Design is trading at a P/S higher than the industry. 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 Guangzhou S.P.I Design's P/S Mean For Investors?

Guangzhou S.P.I Design's shares may have suffered, but its P/S remains high. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Guangzhou S.P.I Design 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. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Guangzhou S.P.I Design (of which 1 is a bit unpleasant!) you should know about.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.