More Unpleasant Surprises Could Be In Store For A-Zenith Home Furnishings Co., Ltd.'s (SHSE:603389) Shares After Tumbling 25%

A-Zenith Home Furnishings Co., Ltd. (SHSE:603389) 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. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 25% in that time.

Although its price has dipped substantially, given around half the companies in China's Consumer Durables industry have price-to-sales ratios (or "P/S") below 2.2x, you may still consider A-Zenith Home Furnishings as a stock to avoid entirely with its 6.5x 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.

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See our latest analysis for A-Zenith Home Furnishings

What Does A-Zenith Home Furnishings' Recent Performance Look Like?

For example, consider that A-Zenith Home Furnishings' 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. If not, then existing shareholders may be quite nervous about the viability of the share price.

Although there are no analyst estimates available for A-Zenith Home Furnishings, take a look at this free data-rich visualisation to see how the company stacks up on 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 A-Zenith Home Furnishings' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 13% 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. 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 7.4% 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 find it worrying that A-Zenith Home Furnishings' P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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 Final Word

A-Zenith Home Furnishings' shares may have suffered, but its P/S remains high. 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 A-Zenith Home Furnishings 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. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with A-Zenith Home Furnishings, and understanding these should be part of your investment process.

If these risks are making you reconsider your opinion on A-Zenith Home Furnishings, 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.