There's Reason For Concern Over Zhenro Services Group Limited's (HKG:6958) Price

It's not a stretch to say that Zhenro Services Group Limited's (HKG:6958) price-to-sales (or "P/S") ratio of 0.2x right now seems quite "middle-of-the-road" for companies in the Real Estate industry in Hong Kong, where the median P/S ratio is around 0.5x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

See our latest analysis for Zhenro Services Group

What Does Zhenro Services Group's Recent Performance Look Like?

We'd have to say that with no tangible growth over the last year, Zhenro Services Group's revenue has been unimpressive. Perhaps the market believes the recent run-of-the-mill revenue performance isn't enough to outperform the industry, which has kept the P/S muted. If not, then existing shareholders may be feeling hopeful about the future direction of the share price.

Although there are no analyst estimates available for Zhenro Services Group, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Some Revenue Growth Forecasted For Zhenro Services Group?

In order to justify its P/S ratio, Zhenro Services Group would need to produce growth that's similar to the industry.

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. That's essentially a continuation of what we've seen over the last three years, as its revenue growth has been virtually non-existent for that entire period. Therefore, it's fair to say that revenue growth has definitely eluded the company recently.

This is in contrast to the rest of the industry, which is expected to grow by 4.6% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it interesting that Zhenro Services Group is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What Does Zhenro Services Group's P/S Mean For Investors?

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 Zhenro Services Group's average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. If recent medium-term revenue trends continue, the probability of a share price decline will become quite substantial, placing shareholders at risk.

You need to take note of risks, for example - Zhenro Services Group has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.