Zhanjiang Guolian Aquatic Products Co., Ltd.'s (SZSE:300094) price-to-sales (or "P/S") ratio of 0.8x may look like a pretty appealing investment opportunity when you consider close to half the companies in the Food industry in China have P/S ratios greater than 1.4x. 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 Zhanjiang Guolian Aquatic Products Has Been Performing

For example, consider that Zhanjiang Guolian Aquatic Products' financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

Is There Any Revenue Growth Forecasted For Zhanjiang Guolian Aquatic Products?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Zhanjiang Guolian Aquatic Products' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 22% decrease to the company's top line. As a result, revenue from three years ago have also fallen 5.7% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 17% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's understandable that Zhanjiang Guolian Aquatic Products' P/S would sit below the majority of other companies. 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. 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 Zhanjiang Guolian Aquatic Products' P/S Mean For Investors?

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.

As we suspected, our examination of Zhanjiang Guolian Aquatic Products revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set 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. If recent medium-term revenue trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

Before you take the next step, you should know about the 2 warning signs for Zhanjiang Guolian Aquatic Products (1 is a bit concerning!) that we have uncovered.

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.