When close to half the companies in the Consumer Services industry in Hong Kong have price-to-sales ratios (or "P/S") below 1x, you may consider Dashan Education Holdings Limited (HKG:9986) as a stock to avoid entirely with its 12.2x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

View our latest analysis for Dashan Education Holdings

How Has Dashan Education Holdings Performed Recently?

Dashan Education Holdings certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. Perhaps the market is expecting future revenue performance to outperform the wider market, which has seemingly got people interested in the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Dashan Education Holdings' to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 113% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 81% overall. 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 19% shows it's an unpleasant look.

In light of this, it's alarming that Dashan Education Holdings' P/S sits above the majority of other companies. 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 Key Takeaway

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.

Our examination of Dashan Education Holdings revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. 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. 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.

You should always think about risks. Case in point, we've spotted 2 warning signs for Dashan Education Holdings you should be aware of.

If you're unsure about the strength of Dashan Education Holdings' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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