Eastern Pioneer Driving School Co., Ltd's (SHSE:603377) price-to-sales (or "P/S") ratio of 2.4x might make it look like a buy right now compared to the Consumer Services industry in China, where around half of the companies have P/S ratios above 4x and even P/S above 9x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

How Eastern Pioneer Driving School Has Been Performing

For instance, Eastern Pioneer Driving School's receding revenue in recent times would have to be some food for thought. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. Those who are bullish on Eastern Pioneer Driving School will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

Is There Any Revenue Growth Forecasted For Eastern Pioneer Driving School?

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

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 9.6%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 17% overall rise in revenue. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Comparing that to the industry, which is predicted to deliver 28% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this information, we can see why Eastern Pioneer Driving School is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

The Key Takeaway

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 Eastern Pioneer Driving School revealed its three-year revenue trends are contributing to its low P/S, given they look worse than current industry expectations. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. 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 Eastern Pioneer Driving School that we have uncovered.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.