The Hunan Tyen Machinery Co.,Ltd (SHSE:900946) share price has done very well over the last month, posting an excellent gain of 26%. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 11% over that time.

After such a large jump in price, you could be forgiven for thinking Hunan Tyen MachineryLtd is a stock not worth researching with a price-to-sales ratios (or "P/S") of 3.6x, considering almost half the companies in China's Auto Components industry have P/S ratios below 2.9x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Hunan Tyen MachineryLtd

How Hunan Tyen MachineryLtd Has Been Performing

Revenue has risen firmly for Hunan Tyen MachineryLtd recently, which is pleasing to see. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors' willingness to pay up for the stock. If not, then existing shareholders may be a little nervous about the viability of the share price.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Hunan Tyen MachineryLtd's to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 25%. However, this wasn't enough as the latest three year period has seen the company endure a nasty 27% drop in revenue in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 28% shows it's an unpleasant look.

With this information, we find it concerning that Hunan Tyen MachineryLtd is trading at a P/S higher than the industry. 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 Final Word

Hunan Tyen MachineryLtd's P/S is on the rise since its shares have risen strongly. 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.

We've established that Hunan Tyen MachineryLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. 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. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Hunan Tyen MachineryLtd with six simple checks on some of these key factors.

If these risks are making you reconsider your opinion on Hunan Tyen MachineryLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.