To the annoyance of some shareholders, Jiangxi Guoguang Commercial Chains Co., Ltd. (SHSE:605188) shares are down a considerable 32% 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 31% share price drop.

Even after such a large drop in price, there still wouldn't be many who think Jiangxi Guoguang Commercial Chains' price-to-sales (or "P/S") ratio of 1.3x is worth a mention when the median P/S in China's Consumer Retailing industry is similar at about 0.8x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

How Jiangxi Guoguang Commercial Chains Has Been Performing

Revenue has risen at a steady rate over the last year for Jiangxi Guoguang Commercial Chains, which is generally not a bad outcome. It might be that many expect the respectable revenue performance to only match most other companies over the coming period, which has kept the P/S from rising. 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 not quite in favour.

How Is Jiangxi Guoguang Commercial Chains' Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like Jiangxi Guoguang Commercial Chains' is when the company's growth is tracking the industry closely.

Taking a look back first, we see that the company managed to grow revenues by a handy 4.9% last year. Still, revenue has barely risen at all in aggregate from three years ago, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Comparing that to the industry, which is predicted to deliver 17% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we find it worrying that Jiangxi Guoguang Commercial Chains' P/S exceeds that of its industry peers. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

The Final Word

Jiangxi Guoguang Commercial Chains' plummeting stock price has brought its P/S back to a similar region as the rest of the industry. 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.

We find it unexpected that Jiangxi Guoguang Commercial Chains trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Jiangxi Guoguang Commercial Chains (2 can't be ignored!) that you should be aware of before investing here.

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.

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.