Those holding Zhang Xiaoquan Inc. (SZSE:301055) shares would be relieved that the share price has rebounded 27% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 22% in the last twelve months.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about Zhang Xiaoquan's P/S ratio of 2.4x, since the median price-to-sales (or "P/S") ratio for the Consumer Durables industry in China is also close to 2x. 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.

What Does Zhang Xiaoquan's P/S Mean For Shareholders?

Zhang Xiaoquan could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. One possibility is that the P/S ratio is moderate because investors think this poor revenue performance will turn around. 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 P/S?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Zhang Xiaoquan's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 18% decrease to the company's top line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 29% overall rise in revenue. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 38% during the coming year according to the dual analysts following the company. With the industry only predicted to deliver 12%, the company is positioned for a stronger revenue result.

In light of this, it's curious that Zhang Xiaoquan's P/S sits in line with the majority of other companies. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Bottom Line On Zhang Xiaoquan's P/S

Zhang Xiaoquan 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.

Looking at Zhang Xiaoquan's analyst forecasts revealed that its superior revenue outlook isn't giving the boost to its P/S that we would've expected. When we see a strong revenue outlook, with growth outpacing the industry, we can only assume potential uncertainty around these figures are what might be placing slight pressure on the P/S ratio. It appears some are indeed anticipating revenue instability, because these conditions should normally provide a boost to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Zhang Xiaoquan, and understanding them should be part of your investment process.

If you're unsure about the strength of Zhang Xiaoquan'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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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.