Shanghai Sanmao Enterprise (Group) Co., Ltd. (SHSE:600689) shareholders that were waiting for something to happen have been dealt a blow with a 29% share price drop in the last month. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 12% in that time.

Even after such a large drop in price, you could still be forgiven for feeling indifferent about Shanghai Sanmao Enterprise (Group)'s P/S ratio of 1.4x, since the median price-to-sales (or "P/S") ratio for the Luxury industry in China is about the same. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

How Shanghai Sanmao Enterprise (Group) Has Been Performing

Revenue has risen firmly for Shanghai Sanmao Enterprise (Group) recently, which is pleasing to see. Perhaps the market is expecting future revenue performance to only keep up with the broader industry, which has keeping the P/S in line with expectations. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

How Is Shanghai Sanmao Enterprise (Group)'s Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Shanghai Sanmao Enterprise (Group)'s to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 8.1% last year. The solid recent performance means it was also able to grow revenue by 6.9% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

This is in contrast to the rest of the industry, which is expected to grow by 20% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's curious that Shanghai Sanmao Enterprise (Group)'s P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Bottom Line On Shanghai Sanmao Enterprise (Group)'s P/S

Following Shanghai Sanmao Enterprise (Group)'s share price tumble, its P/S is just clinging on to the industry median P/S. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Shanghai Sanmao Enterprise (Group) 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. If recent medium-term revenue trends continue, the probability of a share price decline will become quite substantial, placing shareholders at risk.

You should always think about risks. Case in point, we've spotted 2 warning signs for Shanghai Sanmao Enterprise (Group) you should be aware of, and 1 of them is potentially serious.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.