The Zhongfu Straits (Pingtan) Development Company Limited (SZSE:000592) share price has fared very poorly over the last month, falling by a substantial 25%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 30% share price drop.

In spite of the heavy fall in price, you could still be forgiven for feeling indifferent about Zhongfu Straits (Pingtan) Development's P/S ratio of 1.9x, since the median price-to-sales (or "P/S") ratio for the Forestry industry in China is also close to 1.5x. 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 Zhongfu Straits (Pingtan) Development Has Been Performing

With revenue growth that's exceedingly strong of late, Zhongfu Straits (Pingtan) Development has been doing very well. Perhaps the market is expecting future revenue performance to taper off, which has kept the P/S from rising. 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 not quite in favour.

Is There Some Revenue Growth Forecasted For Zhongfu Straits (Pingtan) Development?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Zhongfu Straits (Pingtan) Development's to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 35%. Revenue has also lifted 13% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

This is in contrast to the rest of the industry, which is expected to grow by 15% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's curious that Zhongfu Straits (Pingtan) Development's P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

What Does Zhongfu Straits (Pingtan) Development's P/S Mean For Investors?

Following Zhongfu Straits (Pingtan) Development's share price tumble, its P/S is just clinging on to the industry median P/S. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We've established that Zhongfu Straits (Pingtan) Development's average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. If recent medium-term revenue trends continue, the probability of a share price decline will become quite substantial, placing shareholders at risk.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Zhongfu Straits (Pingtan) Development you should know about.

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.