GuangDong GenSho Logistics Co.,LTD (SHSE:603813) shareholders that were waiting for something to happen have been dealt a blow with a 27% share price drop in the last month. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 22% share price drop.

Although its price has dipped substantially, given close to half the companies operating in China's Transportation industry have price-to-sales ratios (or "P/S") below 2.2x, you may still consider GuangDong GenSho LogisticsLTD as a stock to potentially avoid with its 2.8x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

How GuangDong GenSho LogisticsLTD Has Been Performing

For example, consider that GuangDong GenSho LogisticsLTD's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

What Are Revenue Growth Metrics Telling Us About The High P/S?

There's an inherent assumption that a company should outperform the industry for P/S ratios like GuangDong GenSho LogisticsLTD's to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 14%. As a result, revenue from three years ago have also fallen 19% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 20% shows it's an unpleasant look.

In light of this, it's alarming that GuangDong GenSho LogisticsLTD's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very 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.

What We Can Learn From GuangDong GenSho LogisticsLTD's P/S?

Despite the recent share price weakness, GuangDong GenSho LogisticsLTD's P/S remains higher than most other companies in the industry. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that GuangDong GenSho LogisticsLTD currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. 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.

Before you settle on your opinion, we've discovered 3 warning signs for GuangDong GenSho LogisticsLTD (2 are a bit unpleasant!) that you should be aware of.

If these risks are making you reconsider your opinion on GuangDong GenSho LogisticsLTD, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.