Lakala Payment Co., Ltd. (SZSE:300773) shares have retraced a considerable 25% in the last month, reversing a fair amount of their solid recent performance. Looking back over the past twelve months the stock has been a solid performer regardless, with a gain of 18%.

In spite of the heavy fall in price, there still wouldn't be many who think Lakala Payment's price-to-sales (or "P/S") ratio of 2.7x is worth a mention when the median P/S in China's Diversified Financial industry is similar at about 2.8x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

How Lakala Payment Has Been Performing

Lakala Payment certainly has been doing a good job lately as its revenue growth has been positive while most other companies have been seeing their revenue go backwards. Perhaps the market is expecting its current strong performance to taper off in accordance to the rest of the industry, which has kept the P/S contained. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Do Revenue Forecasts Match The P/S Ratio?

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

Taking a look back first, we see that the company managed to grow revenues by a handy 8.4% last year. Still, lamentably revenue has fallen 7.0% in aggregate from three years ago, which is disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 7.3% per year during the coming three years according to the six analysts following the company. With the industry predicted to deliver 12% growth per annum, the company is positioned for a weaker revenue result.

With this in mind, we find it intriguing that Lakala Payment's P/S is closely matching its industry peers. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What We Can Learn From Lakala Payment's P/S?

With its share price dropping off a cliff, the P/S for Lakala Payment looks to be in line with the rest of the Diversified Financial industry. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

When you consider that Lakala Payment's revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you settle on your opinion, we've discovered 3 warning signs for Lakala Payment (1 is a bit unpleasant!) that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.