Pinning Down Guangzhou Pearl River Piano Group Co.,Ltd's (SZSE:002678) P/S Is Difficult Right Now

Guangzhou Pearl River Piano Group Co.,Ltd's (SZSE:002678) price-to-sales (or "P/S") ratio of 7x may look like a poor investment opportunity when you consider close to half the companies in the Leisure industry in China have P/S ratios below 3x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for Guangzhou Pearl River Piano GroupLtd

What Does Guangzhou Pearl River Piano GroupLtd's P/S Mean For Shareholders?

For instance, Guangzhou Pearl River Piano GroupLtd's receding revenue in recent times would have to be some food for thought. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. 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 Guangzhou Pearl River Piano GroupLtd's earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Guangzhou Pearl River Piano GroupLtd would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a frustrating 41% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 60% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 21% shows it's an unpleasant look.

With this in mind, we find it worrying that Guangzhou Pearl River Piano GroupLtd's 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. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What Does Guangzhou Pearl River Piano GroupLtd's P/S Mean For Investors?

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 Guangzhou Pearl River Piano GroupLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. 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 recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Plus, you should also learn about this 1 warning sign we've spotted with Guangzhou Pearl River Piano GroupLtd.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.