Jiangxi Changyun Co., Ltd. (SHSE:600561) shareholders have had their patience rewarded with a 27% share price jump in the last month. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 7.0% over the last year.

Even after such a large jump in price, Jiangxi Changyun may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 1x, since almost half of all companies in the Transportation industry in China have P/S ratios greater than 2.4x and even P/S higher than 5x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

What Does Jiangxi Changyun's P/S Mean For Shareholders?

The recent revenue growth at Jiangxi Changyun would have to be considered satisfactory if not spectacular. One possibility is that the P/S ratio is low because investors think this good revenue growth might actually underperform the broader industry in the near future. If that doesn't eventuate, then existing shareholders may have reason to be optimistic about the future direction of the share price.

Do Revenue Forecasts Match The Low P/S Ratio?

Jiangxi Changyun's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

Retrospectively, the last year delivered a decent 7.0% gain to the company's revenues. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 24% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 7.3% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's understandable that Jiangxi Changyun's P/S would sit below the majority of other companies. 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. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Final Word

The latest share price surge wasn't enough to lift Jiangxi Changyun's P/S close to the industry median. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Jiangxi Changyun 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. Given the current circumstances, it seems unlikely that the share price will experience any significant movement in either direction in the near future if recent medium-term revenue trends persist.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Jiangxi Changyun with six simple checks on some of these key factors.

If you're unsure about the strength of Jiangxi Changyun'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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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.