Genimous Technology Co., Ltd. (SZSE:000676) shareholders that were waiting for something to happen have been dealt a blow with a 25% share price drop in the last month. Longer-term shareholders would now have taken a real hit with the stock declining 3.2% in the last year.

Since its price has dipped substantially, Genimous Technology may be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 3.1x, since almost half of all companies in the Software industry in China have P/S ratios greater than 4.5x and even P/S higher than 8x are not unusual. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

How Genimous Technology Has Been Performing

For instance, Genimous Technology's receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

How Is Genimous Technology's Revenue Growth Trending?

In order to justify its P/S ratio, Genimous Technology would need to produce sluggish growth that's trailing the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 24%. As a result, revenue from three years ago have also fallen 79% overall. 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 30% shows it's an unpleasant look.

With this information, we are not surprised that Genimous Technology is trading at a P/S lower than the industry. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Final Word

Genimous Technology's recently weak share price has pulled its P/S back below other Software companies. 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.

Our examination of Genimous Technology confirms that the company's shrinking revenue over the past medium-term is a key factor in its low price-to-sales ratio, given the industry is projected to grow. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. If recent medium-term revenue trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Genimous Technology that you should be aware of.

If these risks are making you reconsider your opinion on Genimous Technology, 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.