Unfortunately for some shareholders, the Guangzhou Echom Sci.&Tech.Co.,Ltd (SZSE:002420) share price has dived 27% in the last thirty days, prolonging recent pain. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 41% in that time.

Since its price has dipped substantially, Guangzhou Echom Sci.&Tech.Co.Ltd's price-to-sales (or "P/S") ratio of 0.7x might make it look like a buy right now compared to the Consumer Durables industry in China, where around half of the companies have P/S ratios above 1.8x and even P/S above 4x are quite common. 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 Guangzhou Echom Sci.&Tech.Co.Ltd

How Guangzhou Echom Sci.&Tech.Co.Ltd Has Been Performing

For instance, Guangzhou Echom Sci.&Tech.Co.Ltd's 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.

How Is Guangzhou Echom Sci.&Tech.Co.Ltd's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as low as Guangzhou Echom Sci.&Tech.Co.Ltd's is when the company's growth is on track to lag the industry.

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 19%. The last three years don't look nice either as the company has shrunk revenue by 21% 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 12% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we understand why Guangzhou Echom Sci.&Tech.Co.Ltd's P/S is lower than most of its industry peers. 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. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

The Bottom Line On Guangzhou Echom Sci.&Tech.Co.Ltd's P/S

The southerly movements of Guangzhou Echom Sci.&Tech.Co.Ltd's shares means its P/S is now sitting at a pretty low level. 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 Guangzhou Echom Sci.&Tech.Co.Ltd 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. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Guangzhou Echom Sci.&Tech.Co.Ltd with six simple checks.

If these risks are making you reconsider your opinion on Guangzhou Echom Sci.&Tech.Co.Ltd, 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.