Eastern Communications Co.,Ltd. (SHSE:600776) shareholders would be excited to see that the share price has had a great month, posting a 34% gain and recovering from prior weakness. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 6.2% in the last twelve months.

Even after such a large jump in price, there still wouldn't be many who think Eastern CommunicationsLtd's price-to-sales (or "P/S") ratio of 4.7x is worth a mention when it essentially matches the median P/S in China's Communications industry. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

How Has Eastern CommunicationsLtd Performed Recently?

As an illustration, revenue has deteriorated at Eastern CommunicationsLtd over the last year, which is not ideal at all. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

Do Revenue Forecasts Match The P/S Ratio?

In order to justify its P/S ratio, Eastern CommunicationsLtd would need to produce growth that's similar to the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 5.2%. As a result, revenue from three years ago have also fallen 4.6% 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 42% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's somewhat alarming that Eastern CommunicationsLtd's P/S sits in line with the majority of other companies. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

The Final Word

Eastern CommunicationsLtd appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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.

The fact that Eastern CommunicationsLtd currently trades at a P/S on par with the rest of the industry is surprising to us since its recent revenues have been in decline over the medium-term, all while the industry is set to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Eastern CommunicationsLtd with six simple checks.

If you're unsure about the strength of Eastern CommunicationsLtd'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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