To the annoyance of some shareholders, Sichuan Huiyuan Optical Communication Co., Ltd. (SZSE:000586) shares are down a considerable 27% in the last month, which continues a horrid run for the company. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 45% in that time.

Although its price has dipped substantially, Sichuan Huiyuan Optical Communication may still be sending buy signals at present with its price-to-sales (or "P/S") ratio of 3.1x, considering almost half of all companies in the Communications industry in China have P/S ratios greater than 4x and even P/S higher than 7x 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 Sichuan Huiyuan Optical Communication Performed Recently?

For example, consider that Sichuan Huiyuan Optical Communication's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. 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.

What Are Revenue Growth Metrics Telling Us About The Low P/S?

In order to justify its P/S ratio, Sichuan Huiyuan Optical Communication would need to produce sluggish growth that's trailing the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 4.5%. This means it has also seen a slide in revenue over the longer-term as revenue is down 13% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 45% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we are not surprised that Sichuan Huiyuan Optical Communication is trading at a P/S lower than the industry. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

The Bottom Line On Sichuan Huiyuan Optical Communication's P/S

The southerly movements of Sichuan Huiyuan Optical Communication's shares means its P/S is now sitting at a pretty low level. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Sichuan Huiyuan Optical Communication confirms that the company's shrinking revenue over the past medium-term is a key factor in its low price-to-sales ratio, given the industry is projected to grow. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Sichuan Huiyuan Optical Communication you should know about.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.