Financial Street Holdings Co., Ltd. (SZSE:000402) shares have continued their recent momentum with a 31% gain in the last month alone. Unfortunately, despite the strong performance over the last month, the full year gain of 3.5% isn't as attractive.

Even after such a large jump in price, Financial Street Holdings may still be sending buy signals at present with its price-to-sales (or "P/S") ratio of 0.8x, considering almost half of all companies in the Real Estate industry in China have P/S ratios greater than 2.5x and even P/S higher than 6x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

How Has Financial Street Holdings Performed Recently?

Financial Street Holdings certainly has been doing a good job lately as its revenue growth has been positive while most other companies have been seeing their revenue go backwards. Perhaps the market is expecting future revenue performance to follow the rest of the industry downwards, which has kept the P/S suppressed. 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.

How Is Financial Street Holdings' Revenue Growth Trending?

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

Taking a look back first, we see that the company grew revenue by an impressive 22% last year. However, this wasn't enough as the latest three year period has seen the company endure a nasty 7.0% drop in revenue in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

Turning to the outlook, the next year should bring diminished returns, with revenue decreasing 10% as estimated by the one analyst watching the company. That's not great when the rest of the industry is expected to grow by 16%.

With this information, we are not surprised that Financial Street Holdings is trading at a P/S lower than the industry. However, shrinking revenues are unlikely to lead to a stable P/S over the longer term. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

What Does Financial Street Holdings' P/S Mean For Investors?

Financial Street Holdings' stock price has surged recently, but its but its P/S still remains modest. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Financial Street Holdings' analyst forecasts revealed that its outlook for shrinking revenue is contributing to its low P/S. As other companies in the industry are forecasting revenue growth, Financial Street Holdings' poor outlook justifies its low P/S ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Having said that, be aware Financial Street Holdings is showing 2 warning signs in our investment analysis, and 1 of those 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.