Elegant Home-Tech Co., Ltd. (SHSE:603221) 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. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 10% share price drop.

Although its price has dipped substantially, there still wouldn't be many who think Elegant Home-Tech's price-to-sales (or "P/S") ratio of 1.9x is worth a mention when the median P/S in China's Building industry is similar at about 1.7x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

What Does Elegant Home-Tech's P/S Mean For Shareholders?

Revenue has risen at a steady rate over the last year for Elegant Home-Tech, which is generally not a bad outcome. It might be that many expect the respectable revenue performance to only match most other companies over the coming period, which has kept the P/S from rising. Those who are bullish on Elegant Home-Tech will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

How Is Elegant Home-Tech's Revenue Growth Trending?

In order to justify its P/S ratio, Elegant Home-Tech would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a decent 4.9% gain to the company's revenues. However, this wasn't enough as the latest three year period has seen an unpleasant 4.7% overall drop in revenue. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 24% shows it's an unpleasant look.

With this information, we find it concerning that Elegant Home-Tech is trading at a fairly similar P/S compared to 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 on the share price eventually.

The Final Word

With its share price dropping off a cliff, the P/S for Elegant Home-Tech looks to be in line with the rest of the Building industry. 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.

Our look at Elegant Home-Tech revealed its shrinking revenues over the medium-term haven't impacted the P/S as much as we anticipated, given the industry is set to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Having said that, be aware Elegant Home-Tech is showing 3 warning signs in our investment analysis, and 1 of those can't be ignored.

If you're unsure about the strength of Elegant Home-Tech's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.