Shandong New Beiyang Information Technology Co., Ltd. (SZSE:002376) shareholders that were waiting for something to happen have been dealt a blow with a 26% share price drop in the last month. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 23% in that time.

Since its price has dipped substantially, Shandong New Beiyang Information Technology's price-to-sales (or "P/S") ratio of 1.7x might make it look like a buy right now compared to the Tech industry in China, where around half of the companies have P/S ratios above 3x and even P/S above 6x 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.

What Does Shandong New Beiyang Information Technology's Recent Performance Look Like?

For instance, Shandong New Beiyang Information Technology'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 Shandong New Beiyang Information Technology's Revenue Growth Trending?

In order to justify its P/S ratio, Shandong New Beiyang Information Technology would need to produce sluggish growth that's trailing the industry.

Retrospectively, the last year delivered a frustrating 11% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 12% 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 28% shows it's an unpleasant look.

With this in mind, we understand why Shandong New Beiyang Information 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.

The Key Takeaway

Shandong New Beiyang Information Technology's recently weak share price has pulled its P/S back below other Tech companies. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Shandong New Beiyang Information Technology confirms that the company's shrinking revenue over the past medium-term is a key factor in its low price-to-sales ratio, given the industry is projected 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.

Before you take the next step, you should know about the 2 warning signs for Shandong New Beiyang Information Technology (1 is potentially serious!) that we have uncovered.

If you're unsure about the strength of Shandong New Beiyang Information Technology's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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