TPV Technology Co., Ltd.'s (SZSE:000727) price-to-sales (or "P/S") ratio of 0.2x might make it look like a strong buy right now compared to the Tech industry in China, where around half of the companies have P/S ratios above 4x and even P/S above 7x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

View our latest analysis for TPV Technology

How TPV Technology Has Been Performing

As an illustration, revenue has deteriorated at TPV Technology over the last year, which is not ideal at all. Perhaps the market believes the recent revenue performance isn't good enough to keep up the industry, causing the P/S ratio to suffer. Those who are bullish on TPV Technology 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 Low P/S?

There's an inherent assumption that a company should far underperform the industry for P/S ratios like TPV Technology's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 16% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 49% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 29% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we understand why TPV Technology's P/S is lower than most of its industry peers. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

What We Can Learn From TPV Technology's P/S?

While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

As we suspected, our examination of TPV Technology 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.

There are also other vital risk factors to consider and we've discovered 2 warning signs for TPV Technology (1 doesn't sit too well with us!) that you should be aware of before investing here.

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.