Dongzhu Ecological Environment Protection Co., Ltd. (SHSE:603359) shareholders have had their patience rewarded with a 38% share price jump in the last month. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 45% in the last twelve months.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Dongzhu Ecological Environment Protection's P/S ratio of 2.9x, since the median price-to-sales (or "P/S") ratio for the Commercial Services industry in China is also close to 2.7x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

How Has Dongzhu Ecological Environment Protection Performed Recently?

The revenue growth achieved at Dongzhu Ecological Environment Protection over the last year would be more than acceptable for most companies. Perhaps the market is expecting future revenue performance to only keep up with the broader industry, which has keeping the P/S in line with expectations. If that doesn't eventuate, then existing shareholders probably aren't too pessimistic about the future direction of the share price.

Is There Some Revenue Growth Forecasted For Dongzhu Ecological Environment Protection?

The only time you'd be comfortable seeing a P/S like Dongzhu Ecological Environment Protection's is when the company's growth is tracking the industry closely.

If we review the last year of revenue growth, the company posted a worthy increase of 8.8%. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 70% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 28% shows it's an unpleasant look.

With this in mind, we find it worrying that Dongzhu Ecological Environment Protection's P/S exceeds that of its industry peers. 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 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 Final Word

Dongzhu Ecological Environment Protection appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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.

The fact that Dongzhu Ecological Environment Protection 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 recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Dongzhu Ecological Environment Protection, and understanding should be part of your investment process.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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