When close to half the companies in the Luxury industry in China have price-to-sales ratios (or "P/S") below 1.9x, you may consider DR Corporation Limited (SZSE:301177) as a stock to avoid entirely with its 4.6x P/S ratio. 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.

Check out our latest analysis for DR

What Does DR's P/S Mean For Shareholders?

DR could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as steep as DR's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered a frustrating 44% 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 3.4% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Shifting to the future, estimates from the four analysts covering the company suggest revenue should grow by 6.0% over the next year. Meanwhile, the rest of the industry is forecast to expand by 20%, which is noticeably more attractive.

With this in consideration, we believe it doesn't make sense that DR's P/S is outpacing its industry peers. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What We Can Learn From DR's P/S?

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've concluded that DR currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. At these price levels, investors should remain cautious, particularly if things don't improve.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for DR (1 shouldn't be ignored) 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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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.