The Zhejiang Heda Technology Co., Ltd. (SHSE:688296) share price has softened a substantial 26% over the previous 30 days, handing back much of the gains the stock has made lately. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 48% in that time.

Since its price has dipped substantially, Zhejiang Heda Technology's price-to-sales (or "P/S") ratio of 2.7x might make it look like a buy right now compared to the Software industry in China, where around half of the companies have P/S ratios above 4.4x and even P/S above 7x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

What Does Zhejiang Heda Technology's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Zhejiang Heda Technology over the last year, which is not ideal at all. 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. Those who are bullish on Zhejiang Heda Technology will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

Do Revenue Forecasts Match The Low P/S Ratio?

In order to justify its P/S ratio, Zhejiang Heda Technology would need to produce sluggish growth that's trailing the industry.

Retrospectively, the last year delivered a frustrating 27% decrease to the company's top line. As a result, revenue from three years ago have also fallen 11% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 28% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this information, we are not surprised that Zhejiang Heda Technology is trading at a P/S lower than the industry. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

What We Can Learn From Zhejiang Heda Technology's P/S?

Zhejiang Heda Technology's recently weak share price has pulled its P/S back below other Software companies. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

It's no surprise that Zhejiang Heda Technology maintains its low P/S off the back of its sliding revenue over the medium-term. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 2 warning signs for Zhejiang Heda Technology that you need to take into consideration.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.

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