Zhihu Inc. (NYSE:ZH) shareholders that were waiting for something to happen have been dealt a blow with a 30% share price drop in the last month.    The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 57% loss during that time.  

After such a large drop in price, Zhihu may be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 0.5x, since almost half of all companies in the Interactive Media and Services industry in the United States have P/S ratios greater than 1.4x and even P/S higher than 4x are not unusual.   However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.  

NYSE:ZH Price to Sales Ratio vs Industry June 18th 2024

What Does Zhihu's P/S Mean For Shareholders?

Zhihu could be doing better as it's been growing revenue less than most other companies lately.   The P/S ratio is probably low because investors think this lacklustre revenue performance isn't going to get any better.  If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.    

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Zhihu.

What Are Revenue Growth Metrics Telling Us About The Low P/S?  

Zhihu's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.  

If we review the last year of revenue growth, the company posted a worthy increase of 8.0%.   The latest three year period has also seen an excellent 154% overall rise in revenue, aided somewhat by its short-term performance.  Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.  

Turning to the outlook, the next three years should bring diminished returns, with revenue decreasing 2.2%  each year as estimated by the seven analysts watching the company.  That's not great when the rest of the industry is expected to grow by 12% per year.

With this in consideration, we find it intriguing that Zhihu's P/S is closely matching its industry peers.  Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse.  There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.  

The Bottom Line On Zhihu's P/S

Zhihu's recently weak share price has pulled its P/S back below other Interactive Media and Services companies.      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.

As we suspected, our examination of Zhihu's analyst forecasts revealed that its outlook for shrinking revenue is contributing to its low P/S.  Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises.  It's hard to see the share price rising strongly in the near future under these circumstances.    

You always need to take note of risks, for example - Zhihu has 1 warning sign  we think you should be aware of.  

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).