LAY-OUT Planning Consultants Co. Ltd. (SZSE:300989) Stock Rockets 54% As Investors Are Less Pessimistic Than Expected

LAY-OUT Planning Consultants Co. Ltd. (SZSE:300989) shareholders would be excited to see that the share price has had a great month, posting a 54% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 43% in the last year.

Since its price has surged higher, you could be forgiven for thinking LAY-OUT Planning Consultants is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 7.6x, considering almost half the companies in China's Professional Services industry have P/S ratios below 3.2x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for LAY-OUT Planning Consultants

What Does LAY-OUT Planning Consultants' Recent Performance Look Like?

For example, consider that LAY-OUT Planning Consultants' 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on LAY-OUT Planning Consultants will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For LAY-OUT Planning Consultants?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like LAY-OUT Planning Consultants' to be considered reasonable.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 4.4%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 13% overall rise in revenue. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 89% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this in mind, we find it worrying that LAY-OUT Planning Consultants' P/S exceeds that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates 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 recent growth rates.

What Does LAY-OUT Planning Consultants' P/S Mean For Investors?

The strong share price surge has lead to LAY-OUT Planning Consultants' P/S soaring as well. 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.

Our examination of LAY-OUT Planning Consultants revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

You need to take note of risks, for example - LAY-OUT Planning Consultants has 4 warning signs (and 2 which are potentially serious) we think you should know about.

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.