The Yonker Environmental Protection Co.,Ltd (SZSE:300187) share price has done very well over the last month, posting an excellent gain of 40%. Unfortunately, despite the strong performance over the last month, the full year gain of 2.8% isn't as attractive.

Following the firm bounce in price, you could be forgiven for thinking Yonker Environmental ProtectionLtd is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 6.1x, considering almost half the companies in China's Commercial Services industry have P/S ratios below 2.7x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

What Does Yonker Environmental ProtectionLtd's Recent Performance Look Like?

For example, consider that Yonker Environmental ProtectionLtd's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

How Is Yonker Environmental ProtectionLtd's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Yonker Environmental ProtectionLtd's to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 18%. The last three years don't look nice either as the company has shrunk revenue by 30% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 28% 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 alarming that Yonker Environmental ProtectionLtd's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Final Word

Yonker Environmental ProtectionLtd's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

Our examination of Yonker Environmental ProtectionLtd revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

And what about other risks? Every company has them, and we've spotted 4 warning signs for Yonker Environmental ProtectionLtd (of which 1 shouldn't be ignored!) you should know about.

If these risks are making you reconsider your opinion on Yonker Environmental ProtectionLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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