Sichuan Shudao Equipment & Technology Co.,Ltd. (SZSE:300540) shareholders won't be pleased to see that the share price has had a very rough month, dropping 25% and undoing the prior period's positive performance. Longer-term shareholders will rue the drop in the share price, since it's now virtually flat for the year after a promising few quarters.

In spite of the heavy fall in price, given around half the companies in China's Machinery industry have price-to-sales ratios (or "P/S") below 2.5x, you may still consider Sichuan Shudao Equipment & TechnologyLtd as a stock to avoid entirely with its 7.2x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

What Does Sichuan Shudao Equipment & TechnologyLtd's Recent Performance Look Like?

With revenue growth that's inferior to most other companies of late, Sichuan Shudao Equipment & TechnologyLtd has been relatively sluggish. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Is There Enough Revenue Growth Forecasted For Sichuan Shudao Equipment & TechnologyLtd?

The only time you'd be truly comfortable seeing a P/S as steep as Sichuan Shudao Equipment & TechnologyLtd's is when the company's growth is on track to outshine the industry decidedly.

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. Still, the latest three year period was better as it's delivered a decent 9.4% overall rise in revenue. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Turning to the outlook, the next year should generate growth of 122% as estimated by the one analyst watching the company. Meanwhile, the rest of the industry is forecast to only expand by 28%, which is noticeably less attractive.

With this information, we can see why Sichuan Shudao Equipment & TechnologyLtd is trading at such a high P/S compared to the industry. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Sichuan Shudao Equipment & TechnologyLtd's P/S?

Even after such a strong price drop, Sichuan Shudao Equipment & TechnologyLtd's P/S still exceeds the industry median significantly. 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.

We've established that Sichuan Shudao Equipment & TechnologyLtd maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Machinery industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

It is also worth noting that we have found 1 warning sign for Sichuan Shudao Equipment & TechnologyLtd that you need to take into consideration.

If these risks are making you reconsider your opinion on Sichuan Shudao Equipment & TechnologyLtd, 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.