To the annoyance of some shareholders, Dong Yi Ri Sheng Home Decoration Group Co.,Ltd. (SZSE:002713) shares are down a considerable 37% in the last month, which continues a horrid run for the company. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 73% loss during that time.

After such a large drop in price, Dong Yi Ri Sheng Home Decoration GroupLtd may be sending very bullish signals at the moment with its price-to-sales (or "P/S") ratio of 0.4x, since almost half of all companies in the Consumer Services industry in China have P/S ratios greater than 3.4x and even P/S higher than 8x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

What Does Dong Yi Ri Sheng Home Decoration GroupLtd's Recent Performance Look Like?

Revenue has risen at a steady rate over the last year for Dong Yi Ri Sheng Home Decoration GroupLtd, which is generally not a bad outcome. It might be that many expect the respectable revenue performance to degrade, which has repressed the P/S. Those who are bullish on Dong Yi Ri Sheng Home Decoration GroupLtd will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

How Is Dong Yi Ri Sheng Home Decoration GroupLtd's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as depressed as Dong Yi Ri Sheng Home Decoration GroupLtd's is when the company's growth is on track to lag the industry decidedly.

Retrospectively, the last year delivered a decent 4.3% gain to the company's revenues. Still, lamentably revenue has fallen 25% in aggregate from three years ago, which is disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 34% shows it's an unpleasant look.

With this in mind, we understand why Dong Yi Ri Sheng Home Decoration GroupLtd's P/S is lower than most of its industry peers. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

What We Can Learn From Dong Yi Ri Sheng Home Decoration GroupLtd's P/S?

Shares in Dong Yi Ri Sheng Home Decoration GroupLtd have plummeted and its P/S has followed suit. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

It's no surprise that Dong Yi Ri Sheng Home Decoration GroupLtd maintains its low P/S off the back of its sliding revenue over the medium-term. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Dong Yi Ri Sheng Home Decoration GroupLtd (1 is potentially serious) you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.

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