Lacklustre Performance Is Driving Hanjia Design Group Co., Ltd.'s (SZSE:300746) 29% Price Drop

Hanjia Design Group Co., Ltd. (SZSE:300746) shares have retraced a considerable 29% in the last month, reversing a fair amount of their solid recent performance. Still, a bad month hasn't completely ruined the past year with the stock gaining 34%, which is great even in a bull market.

Following the heavy fall in price, Hanjia Design Group may be sending very bullish signals at the moment with its price-to-sales (or "P/S") ratio of 1.9x, since almost half of all companies in the Professional Services industry in China have P/S ratios greater than 3.9x and even P/S higher than 9x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

View our latest analysis for Hanjia Design Group

How Hanjia Design Group Has Been Performing

As an illustration, revenue has deteriorated at Hanjia Design Group over the last year, which is not ideal at all. One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

Although there are no analyst estimates available for Hanjia Design Group, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Hanjia Design Group's Revenue Growth Trending?

There's an inherent assumption that a company should far underperform the industry for P/S ratios like Hanjia Design Group's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 29% 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 39% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 28% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we understand why Hanjia Design Group's P/S is lower than most of its industry peers. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

The Bottom Line On Hanjia Design Group's P/S

Having almost fallen off a cliff, Hanjia Design Group's share price has pulled its P/S way down as well. 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.

Our examination of Hanjia Design Group confirms that the company's shrinking revenue over the past medium-term is a key factor in its low price-to-sales ratio, given the industry is projected to grow. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

You always need to take note of risks, for example - Hanjia Design Group has 3 warning signs we think you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.