Xueda (Xiamen) Education Technology Group Co., Ltd (SZSE:000526) shareholders that were waiting for something to happen have been dealt a blow with a 26% share price drop in the last month. Still, a bad month hasn't completely ruined the past year with the stock gaining 71%, which is great even in a bull market.

In spite of the heavy fall in price, it's still not a stretch to say that Xueda (Xiamen) Education Technology Group's price-to-sales (or "P/S") ratio of 2.4x right now seems quite "middle-of-the-road" compared to the Consumer Services industry in China, where the median P/S ratio is around 2.8x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

What Does Xueda (Xiamen) Education Technology Group's Recent Performance Look Like?

Recent times have been advantageous for Xueda (Xiamen) Education Technology Group as its revenues have been rising faster than most other companies. It might be that many expect the strong revenue performance to wane, which has kept the P/S ratio 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 Xueda (Xiamen) Education Technology Group's Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Xueda (Xiamen) Education Technology Group's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 32% gain to the company's top line. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 4.9% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Shifting to the future, estimates from the five analysts covering the company suggest revenue should grow by 24% over the next year. Meanwhile, the rest of the industry is forecast to expand by 33%, which is noticeably more attractive.

With this information, we find it interesting that Xueda (Xiamen) Education Technology Group is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Final Word

With its share price dropping off a cliff, the P/S for Xueda (Xiamen) Education Technology Group looks to be in line with the rest of the Consumer Services 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.

Our look at the analysts forecasts of Xueda (Xiamen) Education Technology Group's revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Xueda (Xiamen) Education Technology Group that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com