ZOY Home Furnishing Co.,Ltd (SHSE:603709) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. Unfortunately, despite the strong performance over the last month, the full year gain of 5.4% isn't as attractive.

In spite of the firm bounce in price, given about half the companies operating in China's Consumer Durables industry have price-to-sales ratios (or "P/S") above 2x, you may still consider ZOY Home FurnishingLtd as an attractive investment with its 1.2x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

What Does ZOY Home FurnishingLtd's P/S Mean For Shareholders?

Recent times have been quite advantageous for ZOY Home FurnishingLtd as its revenue has been rising very briskly. One possibility is that the P/S ratio is low because investors think this strong revenue growth might actually underperform the broader industry in the near future. Those who are bullish on ZOY Home FurnishingLtd will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Is There Any Revenue Growth Forecasted For ZOY Home FurnishingLtd?

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

If we review the last year of revenue growth, the company posted a terrific increase of 74%. The latest three year period has also seen a 5.0% overall rise in revenue, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 11% shows it's noticeably less attractive.

With this in consideration, it's easy to understand why ZOY Home FurnishingLtd's P/S falls short of the mark set by its industry peers. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Final Word

Despite ZOY Home FurnishingLtd's share price climbing recently, its P/S still lags most other companies. 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.

Our examination of ZOY Home FurnishingLtd confirms that the company's revenue trends over the past three-year years are a key factor in its low price-to-sales ratio, as we suspected, given they fall short of current industry expectations. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with ZOY Home FurnishingLtd (at least 1 which shouldn't be ignored), and understanding them should be part of your investment process.

If these risks are making you reconsider your opinion on ZOY Home FurnishingLtd, 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.