Zhongjie (Jiangsu) Technology Co.,Ltd. (SZSE:301072) shares have had a really impressive month, gaining 51% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 28% in the last year.

Since its price has surged higher, given close to half the companies operating in China's Auto Components industry have price-to-sales ratios (or "P/S") below 2.4x, you may consider Zhongjie (Jiangsu) TechnologyLtd as a stock to potentially avoid with its 4.4x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

What Does Zhongjie (Jiangsu) TechnologyLtd's Recent Performance Look Like?

Revenue has risen firmly for Zhongjie (Jiangsu) TechnologyLtd recently, which is pleasing to see. Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up. If not, then existing shareholders may be a little nervous about the viability of the share price.

How Is Zhongjie (Jiangsu) TechnologyLtd's Revenue Growth Trending?

Zhongjie (Jiangsu) TechnologyLtd's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 11% last year. Pleasingly, revenue has also lifted 38% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 22% shows it's noticeably less attractive.

With this in mind, we find it worrying that Zhongjie (Jiangsu) TechnologyLtd's P/S exceeds that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Final Word

Zhongjie (Jiangsu) TechnologyLtd's P/S is on the rise since its shares have risen strongly. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

The fact that Zhongjie (Jiangsu) TechnologyLtd 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. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

It is also worth noting that we have found 3 warning signs for Zhongjie (Jiangsu) TechnologyLtd (2 are a bit concerning!) that you need to take into consideration.

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.