Sunlands Technology Group (NYSE:STG) shares have had a horrible month, losing 44% after a relatively good period beforehand. For any long-term shareholders, the last month ends a year to forget by locking in a 51% share price decline.

Since its price has dipped substantially, it would be understandable if you think Sunlands Technology Group is a stock with good investment prospects with a price-to-sales ratios (or "P/S") of 0.2x, considering almost half the companies in the United States' Consumer Services industry have P/S ratios above 1.5x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

What Does Sunlands Technology Group's P/S Mean For Shareholders?

For example, consider that Sunlands Technology Group's financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the recent revenue performance isn't good enough to keep up the industry, causing the P/S ratio to suffer. Those who are bullish on Sunlands Technology Group will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

What Are Revenue Growth Metrics Telling Us About The Low P/S?

The only time you'd be truly comfortable seeing a P/S as low as Sunlands Technology Group's is when the company's growth is on track to lag the industry.

Retrospectively, the last year delivered a frustrating 7.4% decrease to the company's top line. As a result, revenue from three years ago have also fallen 15% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 12% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we understand why Sunlands Technology Group's P/S is lower than most of its industry peers. 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. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Key Takeaway

Sunlands Technology Group's recently weak share price has pulled its P/S back below other Consumer Services companies. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Sunlands Technology Group revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

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

If you're unsure about the strength of Sunlands Technology 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.