Guangzhou Echom Sci.&Tech.Co.,Ltd (SZSE:002420) shares have had a really impressive month, gaining 36% after a shaky period beforehand. Unfortunately, despite the strong performance over the last month, the full year gain of 7.8% isn't as attractive.

Although its price has surged higher, Guangzhou Echom Sci.&Tech.Co.Ltd may still be sending buy signals at present with its price-to-sales (or "P/S") ratio of 1.1x, considering almost half of all companies in the Consumer Durables industry in China have P/S ratios greater than 2x and even P/S higher than 4x aren't out of the ordinary. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

How Has Guangzhou Echom Sci.&Tech.Co.Ltd Performed Recently?

For instance, Guangzhou Echom Sci.&Tech.Co.Ltd's receding revenue in recent times would have to be some food for thought. 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 Guangzhou Echom Sci.&Tech.Co.Ltd 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?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Guangzhou Echom Sci.&Tech.Co.Ltd's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 4.9% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 32% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 9.3% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we understand why Guangzhou Echom Sci.&Tech.Co.Ltd's P/S is lower than most of its industry peers. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

What Does Guangzhou Echom Sci.&Tech.Co.Ltd's P/S Mean For Investors?

The latest share price surge wasn't enough to lift Guangzhou Echom Sci.&Tech.Co.Ltd's P/S close to the industry median. 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.

As we suspected, our examination of Guangzhou Echom Sci.&Tech.Co.Ltd 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.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Guangzhou Echom Sci.&Tech.Co.Ltd with six simple checks will allow you to discover any risks that could be an issue.

If these risks are making you reconsider your opinion on Guangzhou Echom Sci.&Tech.Co.Ltd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.