Unfortunately for some shareholders, the Nanjing Canatal Data-Centre Environmental Tech Co., Ltd (SHSE:603912) share price has dived 26% in the last thirty days, prolonging recent pain. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 31% in that time.

Although its price has dipped substantially, when almost half of the companies in China's Machinery industry have price-to-sales ratios (or "P/S") below 2.6x, you may still consider Nanjing Canatal Data-Centre Environmental Tech as a stock not worth researching with its 5.9x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Nanjing Canatal Data-Centre Environmental Tech

How Has Nanjing Canatal Data-Centre Environmental Tech Performed Recently?

The recent revenue growth at Nanjing Canatal Data-Centre Environmental Tech would have to be considered satisfactory if not spectacular. Perhaps the market believes the recent revenue performance is strong enough to outperform the industry, which has inflated the P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Nanjing Canatal Data-Centre Environmental Tech's to be considered reasonable.

If we review the last year of revenue growth, the company posted a worthy increase of 6.9%. Still, revenue has barely risen at all in aggregate from three years ago, which is not ideal. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 28% shows it's noticeably less attractive.

With this information, we find it concerning that Nanjing Canatal Data-Centre Environmental Tech is trading at a P/S higher than the industry. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. 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

Even after such a strong price drop, Nanjing Canatal Data-Centre Environmental Tech's P/S still exceeds the industry median significantly. 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.

The fact that Nanjing Canatal Data-Centre Environmental Tech currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with Nanjing Canatal Data-Centre Environmental Tech (at least 1 which is a bit unpleasant), and understanding them should be part of your investment process.

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).

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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.