Ningbo Xianfeng New Material Co.,Ltd (SZSE:300163) shareholders won't be pleased to see that the share price has had a very rough month, dropping 39% and undoing the prior period's positive performance. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 47% in that time.

Even after such a large drop in price, you could still be forgiven for thinking Ningbo Xianfeng New MaterialLtd is a stock not worth researching with a price-to-sales ratios (or "P/S") of 3.3x, considering almost half the companies in China's Luxury industry have P/S ratios below 1.6x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

What Does Ningbo Xianfeng New MaterialLtd's P/S Mean For Shareholders?

For instance, Ningbo Xianfeng New MaterialLtd's receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Ningbo Xianfeng New MaterialLtd's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 18% decrease to the company's top line. As a result, revenue from three years ago have also fallen 19% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 18% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that Ningbo Xianfeng New MaterialLtd is trading at a P/S higher than 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. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Final Word

There's still some elevation in Ningbo Xianfeng New MaterialLtd's P/S, even if the same can't be said for its share price recently. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Ningbo Xianfeng New MaterialLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Before you take the next step, you should know about the 1 warning sign for Ningbo Xianfeng New MaterialLtd that we have uncovered.

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.