To the annoyance of some shareholders, Nanjing Putian Telecommunications Co., Ltd. (SZSE:200468) shares are down a considerable 26% in the last month, which continues a horrid run for the company. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 38% share price drop.

Since its price has dipped substantially, Nanjing Putian Telecommunications' price-to-sales (or "P/S") ratio of 0.4x might make it look like a strong buy right now compared to the wider Communications industry in China, where around half of the companies have P/S ratios above 4.8x and even P/S above 8x 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.

Check out our latest analysis for Nanjing Putian Telecommunications

What Does Nanjing Putian Telecommunications' P/S Mean For Shareholders?

For instance, Nanjing Putian Telecommunications' receding revenue in recent times would have to be some food for thought. 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. 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.

Do Revenue Forecasts Match The Low P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as depressed as Nanjing Putian Telecommunications' is when the company's growth is on track to lag the industry decidedly.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 5.8%. The last three years don't look nice either as the company has shrunk revenue by 15% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 42% shows it's an unpleasant look.

In light of this, it's understandable that Nanjing Putian Telecommunications' 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 We Can Learn From Nanjing Putian Telecommunications' P/S?

Shares in Nanjing Putian Telecommunications have plummeted and its P/S has followed suit. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Nanjing Putian Telecommunications revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. 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.

It is also worth noting that we have found 2 warning signs for Nanjing Putian Telecommunications (1 is concerning!) that you need to take into consideration.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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