To the annoyance of some shareholders, Tongdao Liepin Group (HKG:6100) shares are down a considerable 26% 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 77% loss during that time.

Although its price has dipped substantially, it's still not a stretch to say that Tongdao Liepin Group's price-to-sales (or "P/S") ratio of 0.4x right now seems quite "middle-of-the-road" compared to the Interactive Media and Services industry in Hong Kong, where the median P/S ratio is around 0.5x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

How Has Tongdao Liepin Group Performed Recently?

Tongdao Liepin Group hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. One possibility is that the P/S ratio is moderate because investors think this poor revenue performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

Do Revenue Forecasts Match The P/S Ratio?

In order to justify its P/S ratio, Tongdao Liepin Group would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a frustrating 9.7% decrease to the company's top line. Regardless, revenue has managed to lift by a handy 9.7% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

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 information, we find it interesting that Tongdao Liepin Group is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Bottom Line On Tongdao Liepin Group's P/S

Tongdao Liepin Group's plummeting stock price has brought its P/S back to a similar region as the rest of the industry. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our look at the analysts forecasts of Tongdao Liepin Group's revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It is also worth noting that we have found 1 warning sign for Tongdao Liepin Group that you need to take into consideration.

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.

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