Unfortunately for some shareholders, the China Shun Ke Long Holdings Limited (HKG:974) share price has dived 29% in the last thirty days, prolonging recent pain. Looking at the bigger picture, even after this poor month the stock is up 26% in the last year.

Even after such a large drop in price, there still wouldn't be many who think China Shun Ke Long Holdings' price-to-sales (or "P/S") ratio of 0.4x is worth a mention when the median P/S in Hong Kong's Consumer Retailing industry is similar at about 0.7x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

How Has China Shun Ke Long Holdings Performed Recently?

China Shun Ke Long Holdings has been doing a decent job lately as it's been growing revenue at a reasonable pace. It might be that many expect the respectable revenue performance to only match most other companies over the coming period, 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 China Shun Ke Long Holdings?

The only time you'd be comfortable seeing a P/S like China Shun Ke Long Holdings' is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered a decent 4.5% gain to the company's revenues. However, this wasn't enough as the latest three year period has seen an unpleasant 25% overall drop in revenue. 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 15% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we find it worrying that China Shun Ke Long Holdings' P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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 Bottom Line On China Shun Ke Long Holdings' P/S

Following China Shun Ke Long Holdings' share price tumble, its P/S is just clinging on to the industry median P/S. 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.

We find it unexpected that China Shun Ke Long Holdings trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You should always think about risks. Case in point, we've spotted 3 warning signs for China Shun Ke Long Holdings you should be aware of, and 2 of them shouldn't be ignored.

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.

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