More Unpleasant Surprises Could Be In Store For Shanghai HYP-ARCH Architectural Design Consultant Co.,Ltd.'s (SZSE:301024) Shares After Tumbling 28%

The Shanghai HYP-ARCH Architectural Design Consultant Co.,Ltd. (SZSE:301024) share price has fared very poorly over the last month, falling by a substantial 28%. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 20% in that time.

In spite of the heavy fall in price, given around half the companies in China's Professional Services industry have price-to-sales ratios (or "P/S") below 2.7x, you may still consider Shanghai HYP-ARCH Architectural Design ConsultantLtd as a stock to avoid entirely with its 7.8x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for Shanghai HYP-ARCH Architectural Design ConsultantLtd

How Shanghai HYP-ARCH Architectural Design ConsultantLtd Has Been Performing

For example, consider that Shanghai HYP-ARCH Architectural Design ConsultantLtd's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Shanghai HYP-ARCH Architectural Design ConsultantLtd's earnings, revenue and cash flow.

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

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Shanghai HYP-ARCH Architectural Design ConsultantLtd's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 16% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 46% in aggregate. 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 92% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's alarming that Shanghai HYP-ARCH Architectural Design ConsultantLtd'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 Bottom Line On Shanghai HYP-ARCH Architectural Design ConsultantLtd's P/S

A significant share price dive has done very little to deflate Shanghai HYP-ARCH Architectural Design ConsultantLtd's very lofty P/S. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our examination of Shanghai HYP-ARCH Architectural Design ConsultantLtd revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. 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 the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Shanghai HYP-ARCH Architectural Design ConsultantLtd, and understanding them should be part of your investment process.

If these risks are making you reconsider your opinion on Shanghai HYP-ARCH Architectural Design ConsultantLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.