Transportation Telecommunication & Information Development Inc.Ltd.Zhejiang (SZSE:300469) shareholders won't be pleased to see that the share price has had a very rough month, dropping 30% and undoing the prior period's positive performance. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 60% loss during that time.

Although its price has dipped substantially, given around half the companies in China's IT industry have price-to-sales ratios (or "P/S") below 3.6x, you may still consider Transportation Telecommunication & Information DevelopmentLtd.Zhejiang as a stock to avoid entirely with its 10x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

What Does Transportation Telecommunication & Information DevelopmentLtd.Zhejiang's P/S Mean For Shareholders?

For example, consider that Transportation Telecommunication & Information DevelopmentLtd.Zhejiang's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is Transportation Telecommunication & Information DevelopmentLtd.Zhejiang's Revenue Growth Trending?

In order to justify its P/S ratio, Transportation Telecommunication & Information DevelopmentLtd.Zhejiang would need to produce outstanding growth that's well in excess of the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 15%. The last three years don't look nice either as the company has shrunk revenue by 63% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 43% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Transportation Telecommunication & Information DevelopmentLtd.Zhejiang's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very 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.

The Bottom Line On Transportation Telecommunication & Information DevelopmentLtd.Zhejiang's P/S

Even after such a strong price drop, Transportation Telecommunication & Information DevelopmentLtd.Zhejiang's P/S still exceeds the industry median significantly. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Transportation Telecommunication & Information DevelopmentLtd.Zhejiang currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

Before you take the next step, you should know about the 2 warning signs for Transportation Telecommunication & Information DevelopmentLtd.Zhejiang that we have uncovered.

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).

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.