If you follow growth stocks, small-cap stocks, China stocks, or some combination of the three (small-cap China growth, anyone?), chances are you noticed that VisionChina Media (Nasdaq: VISN) is down some 71% thus far this year

When a stock drops that much, it gets my attention. That's because dumpster-diving can be a very profitable activity. So what's the outlook for VisionChina Media? And is it a buy?

Meet our contestant
VisionChina's business, in which it distributes television content and advertising to buses and subways in China, was once appealing to investors for a number of reasons.

First, it was fast-growing. Sales were up more than 250% in 2008 and more than 70% through the first half of 2009. Second, it was light on capital, with operating expenditures checking in at less than 20% of sales in 2008. Third, it had a strong balance sheet with more than $100 million in net cash. Finally, it was wildly profitable, with better than 60% gross and 40% operating margins in 2008.

All of this propelled the stock up to more than $20 per share. Then, however, the advertising market in China began to weaken and Vision's results began to suffer. The stock was trading for over $8 at the beginning of March and closed yesterday at a bit over $3.

What happened
As advertising rates drop in China, Vision's sales are slowing and profit margins are narrowing. In fact, sales were up just 3% in the fourth quarter and the company's gross margin dropped to 45%.

This problem was compounded by the company's decision to purchase DMG Media, the operator of digital mobile TVs in the Shanghai subway system, for $160 million in cash and stock. That move dramatically increased the company's fixed costs and weakened its balance sheet, at a time (the present) when it doesn't look prudent to have done either of those things.

All of this resulted in the company issuing first-quarter 2010 guidance of "no less than $22 million" in sales -- a number the company just barely bested while posting a $12 million operating loss. Put it all together, and VisionChina is no longer fast-growing, no longer has a strong balance sheet, and is no longer wildly profitable. So you can understand why the market has soured on the stock.

So is it a buy?
The problem with VisionChina's now is that it's seen a near 50% drop in its average revenue per broadcasting hour. While the company asserts it hasn't lowered prices, but rather just seen lower volumes, this could be a tough swoon to recover from. Further, VisionChina's next round of expansion should come in China's tier 2 and tier 3 markets, where consumers have less discretionary income and advertising rates presumably are lower.

Thus, it's unclear where rates will settle out as the advertising environment rebounds in China, given the potential revenue-mix shifts. While VisionChina's networks in Beijing and Shanghai are premium assets that should command premium prices, revenue and margins will be down if growth largely takes place in tier 2 and smaller cities such as Harbin and Chengdu.

The good news for VisionChina, however, is that its two largest customers are YUM! Brands (NYSE: YUM) and Unilever (NYSE: UL) -- multinational consumer companies that have made expansion in China a key part of their growth strategies going forward. Thus, these companies should be able to be relatively consistent spenders on marketing, which means there is a floor to Vision's results even if the Chinese economy hits a rough patch later this year.

The key fact for investors, though, is that any valuation of VisionChina will vary widely depending on our ad rate assumption.

If we believe in the Chinese consumer, and that Chinese companies and multinationals will try to build well-known nationwide brands in China, then we would forecast a brisk advertising recovery in all markets. By that logic, we should buy VisionChina stock at today's prices, even if we have to ride out a rough first quarter.

If, however, we believe that it will take a much longer time to bridge the gap between China's rich and poor, then VisionChina's stock still doesn't quite look like a bargain.

We need to know more
I'm holding off on VisionChina for now, and continuing to gather information. As part of that process, our Motley Fool Global Gains research team is set to visit with members of the management team at VisionChina during our research trip to China in July. We hope to get answers to our questions and an update on the advertising market in China so we return able to make a decision about the future for the company's stock.

If you'd like to sign up to get our notes from that meeting, as well as our notes from 20 other meetings with promising Chinese companies, simply enter your email in the box below.

This article was first published on March 26, 2010. It has been updated.

Tim Hanson is co-advisor of Motley Fool Global Gains. He does not own shares of any company mentioned. Unilever is a Motley Fool Global Gains pick as well as an Income Investor recommendation. Motley Fool Options has recommended a bull call spread position on Yum! Brands. The Motley Fool often anthropomorphizes its disclosure policy, but that hurts its feelings.