Yonker Environmental Protection Co.,Ltd (SZSE:300187) shareholders won't be pleased to see that the share price has had a very rough month, dropping 27% 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 24% share price drop.

Even after such a large drop in price, when almost half of the companies in China's Commercial Services industry have price-to-sales ratios (or "P/S") below 2.5x, you may still consider Yonker Environmental ProtectionLtd as a stock not worth researching with its 5.1x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

What Does Yonker Environmental ProtectionLtd's P/S Mean For Shareholders?

For example, consider that Yonker Environmental ProtectionLtd's financial performance has been poor lately as its revenue has been in decline. 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.

How Is Yonker Environmental ProtectionLtd's Revenue Growth Trending?

In order to justify its P/S ratio, Yonker Environmental ProtectionLtd would need to produce outstanding growth that's well in excess of the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 28%. This means it has also seen a slide in revenue over the longer-term as revenue is down 27% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 31% 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 Yonker Environmental ProtectionLtd 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 Yonker Environmental ProtectionLtd's P/S Mean For Investors?

A significant share price dive has done very little to deflate Yonker Environmental ProtectionLtd's very lofty 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.

We've established that Yonker Environmental ProtectionLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Yonker Environmental ProtectionLtd (of which 1 is a bit concerning!) you should know about.

If you're unsure about the strength of Yonker Environmental ProtectionLtd'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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