To the annoyance of some shareholders, Tongdao Liepin Group (HKG:6100) shares are down a considerable 28% 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 74% loss during that time.

In spite of the heavy fall in price, you could still be forgiven for feeling indifferent about Tongdao Liepin Group's P/S ratio of 0.5x, since the median price-to-sales (or "P/S") ratio for the Interactive Media and Services industry in Hong Kong is about the same. 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.

What Does Tongdao Liepin Group's P/S Mean For Shareholders?

Tongdao Liepin Group could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. Perhaps the market is expecting its poor revenue performance to improve, keeping the P/S from dropping. However, if this isn't the case, investors might get caught out paying too much for the stock.

How Is Tongdao Liepin Group's Revenue Growth Trending?

Tongdao Liepin Group's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 9.7%. Regardless, revenue has managed to lift by a handy 9.7% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 3.0% as estimated by the six analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 10%, which is noticeably more attractive.

With this in mind, we find it intriguing that Tongdao Liepin Group's P/S is closely matching its industry peers. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

With its share price dropping off a cliff, the P/S for Tongdao Liepin Group looks to be in line with the rest of the Interactive Media and Services industry. 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.

When you consider that Tongdao Liepin Group's revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you take the next step, you should know about the 1 warning sign for Tongdao Liepin Group that we have uncovered.

If you're unsure about the strength of Tongdao Liepin Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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