When close to half the companies operating in the Media industry in the United States have price-to-sales ratios (or "P/S") above 1x, you may consider TuanChe Limited (NASDAQ:TC) as an attractive investment with its 0.5x 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 limited.
How Has TuanChe Performed Recently?
For example, consider that TuanChe's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.
Want the full picture on earnings, revenue and cash flow for the company? Then our free report on TuanChe will help you shine a light on its historical performance.
Do Revenue Forecasts Match The Low P/S Ratio?
In order to justify its P/S ratio, TuanChe would need to produce sluggish growth that's trailing the industry.
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 49%. As a result, revenue from three years ago have also fallen 72% 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 3.3% shows it's an unpleasant look.
In light of this, it's understandable that TuanChe's P/S would sit below the majority of other companies. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.
The Key Takeaway
It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
It's no surprise that TuanChe 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. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.
You should always think about risks. Case in point, we've spotted 5 warning signs for TuanChe you should be aware of, and 2 of them can't be ignored.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here