Risks Still Elevated At These Prices As Shanghai HYP-ARCH Architectural Design Consultant Co.,Ltd. (SZSE:301024) Shares Dive 28%

Shanghai HYP-ARCH Architectural Design Consultant Co.,Ltd. (SZSE:301024) shares have had a horrible month, losing 28% after a relatively good period beforehand. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 29% in that time.

In spite of the heavy fall in price, Shanghai HYP-ARCH Architectural Design ConsultantLtd may still be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 15.8x, since almost half of all companies in the Professional Services industry 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 highly elevated P/S.

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

What Does Shanghai HYP-ARCH Architectural Design ConsultantLtd's Recent Performance Look Like?

For instance, Shanghai HYP-ARCH Architectural Design ConsultantLtd'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. 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.

Is There Enough Revenue Growth Forecasted For Shanghai HYP-ARCH Architectural Design ConsultantLtd?

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.

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 51%. The last three years don't look nice either as the company has shrunk revenue by 75% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 25% 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 Key Takeaway

Even after such a strong price drop, Shanghai HYP-ARCH Architectural Design ConsultantLtd's P/S still exceeds the industry median significantly. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Shanghai HYP-ARCH Architectural Design ConsultantLtd 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. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

It is also worth noting that we have found 2 warning signs for Shanghai HYP-ARCH Architectural Design ConsultantLtd (1 shouldn't be ignored!) that you need to take into consideration.

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.