You may think that with a price-to-sales (or "P/S") ratio of 8.7x Zhejiang MTCN Technology Co.,Ltd. (SZSE:003026) is a stock to potentially avoid, seeing as almost half of all the Semiconductor companies in China have P/S ratios under 6.8x and even P/S lower than 3x aren't out of the ordinary. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Zhejiang MTCN TechnologyLtd

How Zhejiang MTCN TechnologyLtd Has Been Performing

As an illustration, revenue has deteriorated at Zhejiang MTCN TechnologyLtd over the last year, which is not ideal at all. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Is There Enough Revenue Growth Forecasted For Zhejiang MTCN TechnologyLtd?

The only time you'd be truly comfortable seeing a P/S as high as Zhejiang MTCN TechnologyLtd's is when the company's growth is on track to outshine the industry.

Retrospectively, the last year delivered a frustrating 11% decrease to the company's top line. Regardless, revenue has managed to lift by a handy 24% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 38% shows it's noticeably less attractive.

In light of this, it's alarming that Zhejiang MTCN TechnologyLtd's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent 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 Zhejiang MTCN TechnologyLtd revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. 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.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Zhejiang MTCN TechnologyLtd that you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.