Despite an already strong run, Shengyi Electronics Co., Ltd. (SHSE:688183) shares have been powering on, with a gain of 41% in the last thirty days. The last month tops off a massive increase of 127% in the last year.

After such a large jump in price, when almost half of the companies in China's Electronic industry have price-to-sales ratios (or "P/S") below 3.4x, you may consider Shengyi Electronics as a stock not worth researching with its 6.5x 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.

How Shengyi Electronics Has Been Performing

For example, consider that Shengyi Electronics' financial performance has been pretty ordinary lately as revenue growth is non-existent. One possibility is that the P/S is high because investors think the benign revenue growth will improve to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Do Revenue Forecasts Match The High P/S Ratio?

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

Retrospectively, the last year delivered virtually the same number to the company's top line as the year before. The lack of growth did nothing to help the company's aggregate three-year performance, which is an unsavory 6.8% drop in revenue. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 25% shows it's an unpleasant look.

In light of this, it's alarming that Shengyi Electronics' 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. 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 Bottom Line On Shengyi Electronics' P/S

The strong share price surge has lead to Shengyi Electronics' P/S soaring as well. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Shengyi Electronics revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Shengyi Electronics (2 don't sit too well with us) you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.

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