To the annoyance of some shareholders, Hangzhou Landscape Architecture Design Institute Co., Ltd. (SZSE:300649) shares are down a considerable 29% 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 52% loss during that time.

Even after such a large drop in price, you could still be forgiven for feeling indifferent about Hangzhou Landscape Architecture Design Institute's P/S ratio of 3.4x, since the median price-to-sales (or "P/S") ratio for the Professional Services industry in China is also close to 2.9x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

What Does Hangzhou Landscape Architecture Design Institute's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Hangzhou Landscape Architecture Design Institute over the last year, which is not ideal at all. One possibility is that the P/S is moderate because investors think the company might still do enough to be in line with the broader industry in the near future. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

Do Revenue Forecasts Match The P/S Ratio?

The only time you'd be comfortable seeing a P/S like Hangzhou Landscape Architecture Design Institute's is when the company's growth is tracking the industry closely.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 56%. This means it has also seen a slide in revenue over the longer-term as revenue is down 54% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 89% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Hangzhou Landscape Architecture Design Institute's P/S exceeds that of its industry peers. 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.

What Does Hangzhou Landscape Architecture Design Institute's P/S Mean For Investors?

With its share price dropping off a cliff, the P/S for Hangzhou Landscape Architecture Design Institute looks to be in line with the rest of the Professional Services industry. 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.

The fact that Hangzhou Landscape Architecture Design Institute currently trades at a P/S on par with the rest of the industry is surprising to us since its recent revenues have been in decline over the medium-term, all while the industry is set 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. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Hangzhou Landscape Architecture Design Institute (at least 2 which don't sit too well with us), and understanding these should be part of your investment process.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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