Unfortunately for some shareholders, the New World Development Company Limited (HKG:17) share price has dived 28% in the last thirty days, prolonging recent pain. For any long-term shareholders, the last month ends a year to forget by locking in a 56% share price decline.

Although its price has dipped substantially, you could still be forgiven for feeling indifferent about New World Development's P/S ratio of 0.3x, since the median price-to-sales (or "P/S") ratio for the Real Estate industry in Hong Kong is also close to 0.6x. 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 New World Development Has Been Performing

While the industry has experienced revenue growth lately, New World Development's revenue has gone into reverse gear, which is not great. One possibility is that the P/S ratio is moderate because investors think this poor revenue performance will turn around. However, if this isn't the case, investors might get caught out paying too much for the stock.

How Is New World Development's Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like New World Development's is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered a frustrating 34% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 48% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 1.0% each year as estimated by the twelve analysts watching the company. With the industry predicted to deliver 5.0% growth per annum, the company is positioned for a weaker revenue result.

In light of this, it's curious that New World Development's P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. 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 New World Development's P/S?

New World Development's plummeting stock price has brought its P/S back to a similar region as the rest of the industry. 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.

Given that New World Development's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. A positive change is needed in order to justify the current price-to-sales ratio.

It is also worth noting that we have found 1 warning sign for New World Development that you need to take into consideration.

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.