To the annoyance of some shareholders, Guangdong Wenke Green Technology Corp.,Ltd. (SZSE:002775) shares are down a considerable 26% in the last month, which continues a horrid run for the company. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 48% in that time.

Following the heavy fall in price, Guangdong Wenke Green TechnologyLtd may be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 1.4x, since almost half of all companies in the Commercial Services industry in China have P/S ratios greater than 2.5x and even P/S higher than 5x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

How Guangdong Wenke Green TechnologyLtd Has Been Performing

As an illustration, revenue has deteriorated at Guangdong Wenke Green TechnologyLtd over the last year, which is not ideal at all. 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. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

Do Revenue Forecasts Match The Low P/S Ratio?

Guangdong Wenke Green TechnologyLtd's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

Retrospectively, the last year delivered a frustrating 20% decrease to the company's top line. As a result, revenue from three years ago have also fallen 68% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 31% 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 understandable that Guangdong Wenke Green TechnologyLtd's P/S would sit below the majority of other companies. 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. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

The Bottom Line On Guangdong Wenke Green TechnologyLtd's P/S

Guangdong Wenke Green TechnologyLtd's recently weak share price has pulled its P/S back below other Commercial Services companies. 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.

Our examination of Guangdong Wenke Green TechnologyLtd 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. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Given the current circumstances, it seems unlikely that the share price will experience any significant movement in either direction in the near future if recent medium-term revenue trends persist.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Guangdong Wenke Green TechnologyLtd (at least 2 which don't sit too well with us), and understanding these should be part of your investment process.

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).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com