Pony Testing Co., Ltd. (SZSE:300887) shares have had a really impressive month, gaining 33% after a shaky period beforehand. But the last month did very little to improve the 59% share price decline over the last year.

Even after such a large jump in price, Pony Testing may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 2.3x, since almost half of all companies in the Professional Services industry in China have P/S ratios greater than 3.2x and even P/S higher than 9x are not unusual. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

How Has Pony Testing Performed Recently?

While the industry has experienced revenue growth lately, Pony Testing's revenue has gone into reverse gear, which is not great. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. If you still 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.

What Are Revenue Growth Metrics Telling Us About The Low P/S?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Pony Testing's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 38% decrease to the company's top line. Regardless, revenue has managed to lift by a handy 24% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Turning to the outlook, the next year should generate growth of 11% as estimated by the five analysts watching the company. That's shaping up to be materially lower than the 31% growth forecast for the broader industry.

With this in consideration, its clear as to why Pony Testing's P/S is falling short industry peers. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From Pony Testing's P/S?

Despite Pony Testing's share price climbing recently, its P/S still lags most other companies. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that Pony Testing maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Plus, you should also learn about these 2 warning signs we've spotted with Pony Testing (including 1 which is a bit concerning).

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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