The Everyday Network Co.,Ltd. (SZSE:300295) share price has done very well over the last month, posting an excellent gain of 26%. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 18% over that time.

Following the firm bounce in price, you could be forgiven for thinking Everyday NetworkLtd is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 12.4x, considering almost half the companies in China's Interactive Media and Services industry have P/S ratios below 4.7x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

How Everyday NetworkLtd Has Been Performing

As an illustration, revenue has deteriorated at Everyday NetworkLtd over the last year, which is not ideal at all. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

Do Revenue Forecasts Match The High P/S Ratio?

Everyday NetworkLtd's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 23%. This means it has also seen a slide in revenue over the longer-term as revenue is down 48% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 9.7% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's alarming that Everyday NetworkLtd's P/S sits above 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 very 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.

The Bottom Line On Everyday NetworkLtd's P/S

Everyday NetworkLtd's P/S has grown nicely over the last month thanks to a handy boost in the share price. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Everyday NetworkLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Everyday NetworkLtd that you should be aware of.

If these risks are making you reconsider your opinion on Everyday NetworkLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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