To the annoyance of some shareholders, China Ecotourism Group Limited (HKG:1371) shares are down a considerable 42% in the last month, which continues a horrid run for the company. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 65% loss during that time.

After such a large drop in price, it would be understandable if you think China Ecotourism Group is a stock with good investment prospects with a price-to-sales ratios (or "P/S") of 0.4x, considering almost half the companies in Hong Kong's Hospitality industry have P/S ratios above 1.5x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

Check out our latest analysis for China Ecotourism Group

How China Ecotourism Group Has Been Performing

For example, consider that China Ecotourism Group's financial performance has been pretty ordinary lately as revenue growth is non-existent. Perhaps the market believes the recent lacklustre revenue performance is a sign of future underperformance relative to industry peers, hurting the P/S. Those who are bullish on China Ecotourism Group will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Do Revenue Forecasts Match The Low P/S Ratio?

In order to justify its P/S ratio, China Ecotourism Group would need to produce sluggish growth that's trailing the industry.

Retrospectively, the last year delivered virtually the same number to the company's top line as the year before. Regardless, revenue has managed to lift by a handy 21% in aggregate from three years ago, thanks to the earlier period of growth. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 42% shows it's noticeably less attractive.

With this in consideration, it's easy to understand why China Ecotourism Group's P/S falls short of the mark set by its industry peers. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Final Word

China Ecotourism Group's recently weak share price has pulled its P/S back below other Hospitality companies. 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.

In line with expectations, China Ecotourism Group maintains its low P/S on the weakness of its recent three-year growth being lower than the wider industry forecast. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Before you take the next step, you should know about the 4 warning signs for China Ecotourism Group (3 shouldn't be ignored!) that we have uncovered.

If these risks are making you reconsider your opinion on China Ecotourism Group, 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.