The Zhengyuan Geomatics Group Co.,Ltd. (SHSE:688509) share price has fared very poorly over the last month, falling by a substantial 27%. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 48% in that time.

In spite of the heavy fall in price, it's still not a stretch to say that Zhengyuan Geomatics GroupLtd's price-to-sales (or "P/S") ratio of 2.5x right now seems quite "middle-of-the-road" compared to the Professional Services industry in China, where the median P/S ratio is around 2.8x. 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.

How Has Zhengyuan Geomatics GroupLtd Performed Recently?

For example, consider that Zhengyuan Geomatics GroupLtd's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

Is There Some Revenue Growth Forecasted For Zhengyuan Geomatics GroupLtd?

In order to justify its P/S ratio, Zhengyuan Geomatics GroupLtd would need to produce growth that's similar to the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 33%. As a result, revenue from three years ago have also fallen 54% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 47% 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 somewhat alarming that Zhengyuan Geomatics GroupLtd's P/S sits in line with the majority of other companies. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

The Key Takeaway

With its share price dropping off a cliff, the P/S for Zhengyuan Geomatics GroupLtd looks to be in line with the rest of the Professional Services 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.

The fact that Zhengyuan Geomatics GroupLtd currently trades at a P/S on par with the rest of the industry is surprising to us since its recent revenues have been in decline over the medium-term, all while the industry is set to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. 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 Zhengyuan Geomatics GroupLtd that you should be aware of.

If you're unsure about the strength of Zhengyuan Geomatics GroupLtd'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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