With a price-to-sales (or "P/S") ratio of 0.7x Leo Group Co., Ltd. (SZSE:002131) may be sending bullish signals at the moment, given that almost half of all the Media companies in China have P/S ratios greater than 2.3x and even P/S higher than 6x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

What Does Leo Group's P/S Mean For Shareholders?

It looks like revenue growth has deserted Leo Group recently, which is not something to boast about. One possibility is that the P/S is low because investors think this benign revenue growth rate will likely underperform the broader industry in the near future. If not, then existing shareholders may be feeling optimistic about the future direction of the share price.

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

Leo Group's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. Still, the latest three year period has seen an excellent 49% overall rise in revenue, in spite of its uninspiring short-term performance. Accordingly, shareholders will be pleased, but also have some questions to ponder about the last 12 months.

This is in contrast to the rest of the industry, which is expected to grow by 19% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in consideration, it's easy to understand why Leo Group's P/S falls short of the mark set by its industry peers. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

The Final Word

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.

In line with expectations, Leo 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. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

Before you settle on your opinion, we've discovered 1 warning sign for Leo Group that you should be aware of.

If you're unsure about the strength of Leo Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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