Shanghai Xinnanyang Only Education & Technology Co.,Ltd (SHSE:600661) shareholders have had their patience rewarded with a 44% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 33%.

In spite of the firm bounce in price, it's still not a stretch to say that Shanghai Xinnanyang Only Education & TechnologyLtd's price-to-sales (or "P/S") ratio of 3.3x right now seems quite "middle-of-the-road" compared to the Consumer Services industry in China, where the median P/S ratio is around 3.7x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

How Has Shanghai Xinnanyang Only Education & TechnologyLtd Performed Recently?

With revenue growth that's exceedingly strong of late, Shanghai Xinnanyang Only Education & TechnologyLtd has been doing very well. Perhaps the market is expecting future revenue performance to taper off, 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.

Do Revenue Forecasts Match The P/S Ratio?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Shanghai Xinnanyang Only Education & TechnologyLtd's to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 41%. However, this wasn't enough as the latest three year period has seen the company endure a nasty 44% drop in revenue in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

Comparing that to the industry, which is predicted to deliver 35% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's somewhat alarming that Shanghai Xinnanyang Only Education & TechnologyLtd's P/S sits in line with the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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 Key Takeaway

Shanghai Xinnanyang Only Education & TechnologyLtd appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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.

We find it unexpected that Shanghai Xinnanyang Only Education & TechnologyLtd 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.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Shanghai Xinnanyang Only Education & TechnologyLtd you should know about.

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).

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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.