Unfortunately for some shareholders, the Shenzhen Division Co.,Ltd. (SZSE:300167) share price has dived 32% 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 69% share price decline.

After such a large drop in price, Shenzhen DivisionLtd's price-to-sales (or "P/S") ratio of 1.3x might make it look like a strong buy right now compared to the wider Communications industry in China, where around half of the companies have P/S ratios above 3.8x and even P/S above 7x are quite common. 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

For example, consider that Shenzhen DivisionLtd's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future. 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 out of favour.

What Are Revenue Growth Metrics Telling Us About The Low P/S?

The only time you'd be truly comfortable seeing a P/S as depressed as Shenzhen DivisionLtd's is when the company's growth is on track to lag the industry decidedly.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 11%. At least revenue has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 50% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Shenzhen DivisionLtd is trading at a P/S lower than the industry. 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 Bottom Line On Shenzhen DivisionLtd's P/S

Shenzhen DivisionLtd's P/S looks about as weak as its stock price lately. 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.

As we suspected, our examination of Shenzhen DivisionLtd revealed its three-year revenue trends are contributing to its low P/S, given they look worse than current industry expectations. 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.

Before you take the next step, you should know about the 4 warning signs for Shenzhen DivisionLtd (2 shouldn't be ignored!) that we have uncovered.

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.