Xinglong Holding (Group) Company Ltd. (SZSE:000955) shares have retraced a considerable 28% in the last month, reversing a fair amount of their solid recent performance. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 17% share price drop.

Although its price has dipped substantially, when almost half of the companies in China's Luxury industry have price-to-sales ratios (or "P/S") below 1.5x, you may still consider Xinglong Holding (Group) as a stock not worth researching with its 3.9x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

How Xinglong Holding (Group) Has Been Performing

As an illustration, revenue has deteriorated at Xinglong Holding (Group) over the last year, which is not ideal at all. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Xinglong Holding (Group)'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 12%. The last three years don't look nice either as the company has shrunk revenue by 43% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 14% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's alarming that Xinglong Holding (Group)'s P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very 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 Bottom Line On Xinglong Holding (Group)'s P/S

Even after such a strong price drop, Xinglong Holding (Group)'s P/S still exceeds the industry median significantly. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Xinglong Holding (Group) currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

Plus, you should also learn about these 2 warning signs we've spotted with Xinglong Holding (Group) (including 1 which is potentially serious).

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.