The Shanghai XNG Holdings Limited (HKG:3666) share price has done very well over the last month, posting an excellent gain of 38%. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 33% in the last twelve months.

Even after such a large jump in price, it would still be understandable if you think Shanghai XNG Holdings is a stock with good investment prospects with a price-to-sales ratios (or "P/S") of 0.2x, considering almost half the companies in Hong Kong's Hospitality industry have P/S ratios above 0.7x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

What Does Shanghai XNG Holdings' P/S Mean For Shareholders?

For instance, Shanghai XNG Holdings' receding revenue in recent times would have to be some food for thought. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. 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 out of favour.

Is There Any Revenue Growth Forecasted For Shanghai XNG Holdings?

In order to justify its P/S ratio, Shanghai XNG Holdings would need to produce sluggish growth that's trailing the industry.

Retrospectively, the last year delivered a frustrating 7.6% decrease to the company's top line. As a result, revenue from three years ago have also fallen 50% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 16% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this information, we are not surprised that Shanghai XNG Holdings is trading at a P/S lower than the industry. 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.

What Does Shanghai XNG Holdings' P/S Mean For Investors?

The latest share price surge wasn't enough to lift Shanghai XNG Holdings' P/S close to the industry median. 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.

As we suspected, our examination of Shanghai XNG Holdings revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. If recent medium-term revenue trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

Before you settle on your opinion, we've discovered 3 warning signs for Shanghai XNG Holdings (2 shouldn't be ignored!) that you should be aware of.

If you're unsure about the strength of Shanghai XNG Holdings' 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.