The LingNan Eco&Culture-Tourism Co.,Ltd. (SZSE:002717) share price has fared very poorly over the last month, falling by a substantial 29%. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 44% in that time.

In spite of the heavy fall in price, you could still be forgiven for feeling indifferent about LingNan Eco&Culture-TourismLtd's P/S ratio of 1.3x, since the median price-to-sales (or "P/S") ratio for the Construction industry in China is also close to 1.1x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

How LingNan Eco&Culture-TourismLtd Has Been Performing

For instance, LingNan Eco&Culture-TourismLtd's receding revenue in recent times would have to be some food for thought. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. 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.

How Is LingNan Eco&Culture-TourismLtd's Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like LingNan Eco&Culture-TourismLtd's is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered a frustrating 27% decrease to the company's top line. As a result, revenue from three years ago have also fallen 66% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 14% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this information, we find it concerning that LingNan Eco&Culture-TourismLtd is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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.

The Key Takeaway

Following LingNan Eco&Culture-TourismLtd's share price tumble, its P/S is just clinging on to the industry median P/S. 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.

The fact that LingNan Eco&Culture-TourismLtd 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. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You should always think about risks. Case in point, we've spotted 2 warning signs for LingNan Eco&Culture-TourismLtd 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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