Aoyuan Beauty Valley Technology Co.,Ltd. (SZSE:000615) shareholders have had their patience rewarded with a 29% share price jump in the last month. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 33% in the last twelve months.

Although its price has surged higher, Aoyuan Beauty Valley TechnologyLtd may still be sending buy signals at present with its price-to-sales (or "P/S") ratio of 1.7x, considering almost half of all companies in the Real Estate industry in China have P/S ratios greater than 2.5x and even P/S higher than 6x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

What Does Aoyuan Beauty Valley TechnologyLtd's Recent Performance Look Like?

For example, consider that Aoyuan Beauty Valley TechnologyLtd's financial performance has been poor lately as its revenue has been in decline. 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.

Do Revenue Forecasts Match The Low P/S Ratio?

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

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 15%. As a result, revenue from three years ago have also fallen 43% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 16% shows it's an unpleasant look.

With this in mind, we understand why Aoyuan Beauty Valley TechnologyLtd's P/S is lower than most of its industry peers. 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. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

The Key Takeaway

Despite Aoyuan Beauty Valley TechnologyLtd's share price climbing recently, its P/S still lags most other companies. 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 examination of Aoyuan Beauty Valley TechnologyLtd 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. Given the current circumstances, it seems unlikely that the share price will experience any significant movement in either direction in the near future if recent medium-term revenue trends persist.

You always need to take note of risks, for example - Aoyuan Beauty Valley TechnologyLtd has 1 warning sign we think you should be aware of.

If you're unsure about the strength of Aoyuan Beauty Valley TechnologyLtd'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.