Hangzhou Landscape Architecture Design Institute Co., Ltd. (SZSE:300649) shareholders would be excited to see that the share price has had a great month, posting a 44% gain and recovering from prior weakness. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 30% in the last twelve months.

Since its price has surged higher, when almost half of the companies in China's Professional Services industry have price-to-sales ratios (or "P/S") below 3.2x, you may consider Hangzhou Landscape Architecture Design Institute as a stock not worth researching with its 6x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

What Does Hangzhou Landscape Architecture Design Institute's P/S Mean For Shareholders?

For example, consider that Hangzhou Landscape Architecture Design Institute's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

Is There Enough Revenue Growth Forecasted For Hangzhou Landscape Architecture Design Institute?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Hangzhou Landscape Architecture Design Institute's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 33% 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 67% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 31% 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 alarming that Hangzhou Landscape Architecture Design Institute'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. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What Does Hangzhou Landscape Architecture Design Institute's P/S Mean For Investors?

Shares in Hangzhou Landscape Architecture Design Institute have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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 Hangzhou Landscape Architecture Design Institute currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Before you settle on your opinion, we've discovered 1 warning sign for Hangzhou Landscape Architecture Design Institute that you should be aware of.

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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