Despite an already strong run, Dong Yi Ri Sheng Home Decoration Group Co.,Ltd. (SZSE:002713) shares have been powering on, with a gain of 25% in the last thirty days. Still, the 30-day jump doesn't change the fact that longer term shareholders have seen their stock decimated by the 63% share price drop in the last twelve months.

Although its price has surged higher, Dong Yi Ri Sheng Home Decoration GroupLtd may still look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 0.5x, considering almost half of all companies in the Consumer Services industry in China have P/S ratios greater than 3.7x and even P/S higher than 8x aren't out of the ordinary. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

How Has Dong Yi Ri Sheng Home Decoration GroupLtd Performed Recently?

As an illustration, revenue has deteriorated at Dong Yi Ri Sheng Home Decoration GroupLtd over the last year, which is not ideal at all. Perhaps the market believes the recent revenue performance isn't good enough to keep up the industry, causing the P/S ratio to suffer. Those who are bullish on Dong Yi Ri Sheng Home Decoration GroupLtd will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

How Is Dong Yi Ri Sheng Home Decoration GroupLtd's Revenue Growth Trending?

There's an inherent assumption that a company should far underperform the industry for P/S ratios like Dong Yi Ri Sheng Home Decoration GroupLtd's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 14% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 43% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 35% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we understand why Dong Yi Ri Sheng Home Decoration GroupLtd's P/S is lower than most of its industry peers. 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.

The Final Word

Shares in Dong Yi Ri Sheng Home Decoration GroupLtd have risen appreciably however, its P/S is still subdued. 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.

As we suspected, our examination of Dong Yi Ri Sheng Home Decoration GroupLtd revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. If recent medium-term revenue trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

It is also worth noting that we have found 3 warning signs for Dong Yi Ri Sheng Home Decoration GroupLtd that you need to take into consideration.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.