Konka Group Co., Ltd.'s (SZSE:000016) price-to-sales (or "P/S") ratio of 0.5x may look like a pretty appealing investment opportunity when you consider close to half the companies in the Consumer Durables industry in China have P/S ratios greater than 2.1x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

See our latest analysis for Konka Group

How Konka Group Has Been Performing

As an illustration, revenue has deteriorated at Konka Group 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 Konka Group will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

How Is Konka Group's Revenue Growth Trending?

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

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 53%. The last three years don't look nice either as the company has shrunk revenue by 54% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 13% shows it's an unpleasant look.

In light of this, it's understandable that Konka Group's P/S would sit below the majority of other companies. 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 Does Konka Group's 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.

It's no surprise that Konka Group maintains its low P/S off the back of its sliding revenue over the medium-term. 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Konka Group, and understanding them should be part of your investment process.

If these risks are making you reconsider your opinion on Konka Group, 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.