Tongyu Communication Inc. (SZSE:002792) shares have continued their recent momentum with a 28% gain in the last month alone. Unfortunately, despite the strong performance over the last month, the full year gain of 9.6% isn't as attractive.

In spite of the firm bounce in price, there still wouldn't be many who think Tongyu Communication's price-to-sales (or "P/S") ratio of 6.6x is worth a mention when the median P/S in China's Communications industry is similar at about 5.7x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

What Does Tongyu Communication's P/S Mean For Shareholders?

The revenue growth achieved at Tongyu Communication over the last year would be more than acceptable for most companies. One possibility is that the P/S is moderate because investors think this respectable revenue growth might not be enough to outperform the broader industry in the near future. If that doesn't eventuate, then existing shareholders probably aren't too pessimistic about the future direction of the share price.

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

There's an inherent assumption that a company should be matching the industry for P/S ratios like Tongyu Communication's to be considered reasonable.

Retrospectively, the last year delivered a decent 10% gain to the company's revenues. However, this wasn't enough as the latest three year period has seen an unpleasant 24% overall drop in revenue. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 40% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's somewhat alarming that Tongyu Communication's P/S sits in line with the majority of other companies. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Final Word

Tongyu Communication appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We find it unexpected that Tongyu Communication trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

It is also worth noting that we have found 2 warning signs for Tongyu Communication (1 can't be ignored!) that you need to take into consideration.

If these risks are making you reconsider your opinion on Tongyu Communication, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.