Dong Yi Ri Sheng Home Decoration Group Co.,Ltd.'s (SZSE:002713) Shares Bounce 27% But Its Business Still Trails The Industry

The Dong Yi Ri Sheng Home Decoration Group Co.,Ltd. (SZSE:002713) share price has done very well over the last month, posting an excellent gain of 27%. But the last month did very little to improve the 60% share price decline over the last year.

In spite of the firm bounce in price, Dong Yi Ri Sheng Home Decoration GroupLtd may still look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 0.5x, considering almost half of all companies in the Consumer Services industry in China have P/S ratios greater than 3.9x and even P/S higher than 8x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

View our latest analysis for Dong Yi Ri Sheng Home Decoration GroupLtd

How Has Dong Yi Ri Sheng Home Decoration GroupLtd Performed Recently?

As an illustration, revenue has deteriorated at Dong Yi Ri Sheng Home Decoration GroupLtd over the last year, which is not ideal at all. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. Those who are bullish on Dong Yi Ri Sheng Home Decoration GroupLtd will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

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 Dong Yi Ri Sheng Home Decoration GroupLtd's earnings, revenue and cash flow.

Do Revenue Forecasts Match The Low P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as depressed as Dong Yi Ri Sheng Home Decoration GroupLtd's is when the company's growth is on track to lag the industry decidedly.

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 14%. This means it has also seen a slide in revenue over the longer-term as revenue is down 43% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 35% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we understand why Dong Yi Ri Sheng Home Decoration GroupLtd's P/S is lower than most of its industry peers. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

What We Can Learn From Dong Yi Ri Sheng Home Decoration GroupLtd's P/S?

Dong Yi Ri Sheng Home Decoration GroupLtd's recent share price jump still sees fails to bring its P/S alongside the industry median. 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.

It's no surprise that Dong Yi Ri Sheng Home Decoration GroupLtd maintains its low P/S off the back of its sliding revenue over the medium-term. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. If recent medium-term revenue trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Dong Yi Ri Sheng Home Decoration GroupLtd you should know about.

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.

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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.