Hangzhou Landscape Architecture Design Institute Co., Ltd.'s (SZSE:300649) Popularity With Investors Under Threat As Stock Sinks 25%

Hangzhou Landscape Architecture Design Institute Co., Ltd. (SZSE:300649) shareholders won't be pleased to see that the share price has had a very rough month, dropping 25% and undoing the prior period's positive performance. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 41% share price drop.

In spite of the heavy fall in price, Hangzhou Landscape Architecture Design Institute may still be sending bearish signals at the moment with its price-to-sales (or "P/S") ratio of 5.1x, since almost half of all companies in the Professional Services in China have P/S ratios under 3.6x and even P/S lower than 1.5x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

See our latest analysis for Hangzhou Landscape Architecture Design Institute

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

For example, consider that Hangzhou Landscape Architecture Design Institute's financial performance has been poor lately as its revenue has been in decline. 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. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Hangzhou Landscape Architecture Design Institute will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For Hangzhou Landscape Architecture Design Institute?

The only time you'd be truly comfortable seeing a P/S as high as Hangzhou Landscape Architecture Design Institute's is when the company's growth is on track to outshine the industry.

Retrospectively, the last year delivered a frustrating 26% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 68% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 25% shows it's an unpleasant look.

In light of this, it's alarming that Hangzhou Landscape Architecture Design Institute's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very 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

Despite the recent share price weakness, Hangzhou Landscape Architecture Design Institute's P/S remains higher than most other companies in the industry. 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.

We've established that Hangzhou Landscape Architecture Design Institute currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

It is also worth noting that we have found 2 warning signs for Hangzhou Landscape Architecture Design Institute (1 shouldn't be ignored!) that you need to take into consideration.

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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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.