Shanghai Xinnanyang Only Education & Technology Co.,Ltd (SHSE:600661) shares have had a really impressive month, gaining 25% after a shaky period beforehand. Looking further back, the 17% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

In spite of the firm bounce in price, there still wouldn't be many who think Shanghai Xinnanyang Only Education & TechnologyLtd's price-to-sales (or "P/S") ratio of 3.5x is worth a mention when the median P/S in China's Consumer Services industry is similar at about 4x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

How Shanghai Xinnanyang Only Education & TechnologyLtd Has Been Performing

The revenue growth achieved at Shanghai Xinnanyang Only Education & TechnologyLtd over the last year would be more than acceptable for most companies. It might be that many expect the respectable revenue performance to wane, which has kept the P/S from rising. If that doesn't eventuate, then existing shareholders probably aren't too pessimistic about the future direction of the share price.

How Is Shanghai Xinnanyang Only Education & TechnologyLtd's Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like Shanghai Xinnanyang Only Education & TechnologyLtd's is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered an exceptional 16% gain to the company's top line. Still, revenue has fallen 52% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 23% shows it's an unpleasant look.

With this in mind, we find it worrying that Shanghai Xinnanyang Only Education & TechnologyLtd's 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. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What We Can Learn From Shanghai Xinnanyang Only Education & TechnologyLtd's P/S?

Its shares have lifted substantially and now Shanghai Xinnanyang Only Education & TechnologyLtd's P/S is back within range of the industry median. 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.

Our look at Shanghai Xinnanyang Only Education & TechnologyLtd revealed its shrinking revenues over the medium-term haven't impacted the P/S as much as we anticipated, given the industry is set 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. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you settle on your opinion, we've discovered 1 warning sign for Shanghai Xinnanyang Only Education & TechnologyLtd that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.