Minsheng Education Group Company Limited (HKG:1569) shareholders are no doubt pleased to see that the share price has bounced 28% in the last month, although it is still struggling to make up recently lost ground. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

Even after such a large jump in price, it would still be understandable if you think Minsheng Education Group is a stock with good investment prospects with a price-to-sales ratios (or "P/S") of 0.4x, considering almost half the companies in Hong Kong's Consumer Services industry have P/S ratios above 1.1x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

How Minsheng Education Group Has Been Performing

For instance, Minsheng Education Group's receding revenue in recent times would have to be some food for thought. 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. 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 out of favour.

Do Revenue Forecasts Match The Low P/S Ratio?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Minsheng Education Group's to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 2.9%. Regardless, revenue has managed to lift by a handy 23% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Comparing that to the industry, which is predicted to deliver 19% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this information, we can see why Minsheng Education Group is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

What Does Minsheng Education Group's P/S Mean For Investors?

The latest share price surge wasn't enough to lift Minsheng Education Group's P/S close to the industry median. 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.

As we suspected, our examination of Minsheng Education Group revealed its three-year revenue trends are contributing to its low P/S, given they look worse than current industry expectations. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

Before you settle on your opinion, we've discovered 3 warning signs for Minsheng Education Group (2 don't sit too well with us!) that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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