The Charles & Colvard, Ltd. (NASDAQ:CTHR) share price has fared very poorly over the last month, falling by a substantial 26%. For any long-term shareholders, the last month ends a year to forget by locking in a 61% share price decline.

In spite of the heavy fall in price, there still wouldn't be many who think Charles & Colvard's price-to-sales (or "P/S") ratio of 0.4x is worth a mention when the median P/S in the United States' Luxury industry is similar at about 0.6x. 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 Charles & Colvard Has Been Performing

As an illustration, revenue has deteriorated at Charles & Colvard over the last year, which is not ideal at all. 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 you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

How Is Charles & Colvard's Revenue Growth Trending?

In order to justify its P/S ratio, Charles & Colvard would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a frustrating 32% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 19% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 6.9% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's somewhat alarming that Charles & Colvard's P/S sits in line with the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What We Can Learn From Charles & Colvard's P/S?

With its share price dropping off a cliff, the P/S for Charles & Colvard looks to be in line with the rest of the Luxury industry. 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 look at Charles & Colvard 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.

You need to take note of risks, for example - Charles & Colvard has 3 warning signs (and 2 which are a bit unpleasant) we think you should know about.

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

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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.