Despite an already strong run, ZheJiang AoKang Shoes Co.,Ltd. (SHSE:603001) shares have been powering on, with a gain of 30% in the last thirty days. Unfortunately, despite the strong performance over the last month, the full year gain of 2.4% isn't as attractive.

Even after such a large jump in price, given about half the companies operating in China's Luxury industry have price-to-sales ratios (or "P/S") above 1.5x, you may still consider ZheJiang AoKang ShoesLtd as an attractive investment with its 0.8x P/S ratio. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

What Does ZheJiang AoKang ShoesLtd's Recent Performance Look Like?

For example, consider that ZheJiang AoKang ShoesLtd's financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the recent revenue performance isn't good enough to keep up the industry, causing the P/S ratio to suffer. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

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 ZheJiang AoKang ShoesLtd's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 4.0% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 14% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 15% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's understandable that ZheJiang AoKang ShoesLtd's P/S would sit below the majority of other companies. 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.

The Key Takeaway

Despite ZheJiang AoKang ShoesLtd's share price climbing recently, its P/S still lags most other companies. 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.

Our examination of ZheJiang AoKang ShoesLtd confirms that the company's shrinking revenue over the past medium-term is a key factor in its low price-to-sales ratio, given the industry is projected to grow. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Having said that, be aware ZheJiang AoKang ShoesLtd is showing 2 warning signs in our investment analysis, and 1 of those is potentially serious.

If you're unsure about the strength of ZheJiang AoKang ShoesLtd's 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.