Lanpec Technologies Limited (SHSE:601798) shareholders won't be pleased to see that the share price has had a very rough month, dropping 27% and undoing the prior period's positive performance. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 24% share price drop.

Even after such a large drop in price, there still wouldn't be many who think Lanpec Technologies' price-to-sales (or "P/S") ratio of 1.8x is worth a mention when the median P/S in China's Energy Services industry is similar at about 2.1x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

What Does Lanpec Technologies' P/S Mean For Shareholders?

Revenue has risen firmly for Lanpec Technologies recently, which is pleasing to see. Perhaps the market is expecting future revenue performance to only keep up with the broader industry, which has keeping the P/S in line with expectations. Those who are bullish on Lanpec Technologies 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 P/S?

Lanpec Technologies' P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 16%. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 4.2% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

In contrast to the company, the rest of the industry is expected to grow by 18% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that Lanpec Technologies is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Key Takeaway

With its share price dropping off a cliff, the P/S for Lanpec Technologies looks to be in line with the rest of the Energy Services industry. 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.

The fact that Lanpec Technologies currently trades at a P/S on par with the rest of the industry is surprising to us since its recent revenues have been in decline over the medium-term, all while the industry is set to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

It is also worth noting that we have found 2 warning signs for Lanpec Technologies (1 is potentially serious!) that you need to take into consideration.

If these risks are making you reconsider your opinion on Lanpec Technologies, 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.