Guangdong Transtek Medical Electronics Co., Ltd (SZSE:300562) shares have had a really impressive month, gaining 28% after a shaky period beforehand. Notwithstanding the latest gain, the annual share price return of 8.0% isn't as impressive.

Even after such a large jump in price, Guangdong Transtek Medical Electronics may still be sending very bullish signals at the moment with its price-to-sales (or "P/S") ratio of 2.3x, since almost half of all companies in the Medical Equipment industry in China have P/S ratios greater than 5x and even P/S higher than 8x are not unusual. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

What Does Guangdong Transtek Medical Electronics' P/S Mean For Shareholders?

With revenue growth that's superior to most other companies of late, Guangdong Transtek Medical Electronics has been doing relatively well. Perhaps the market is expecting future revenue performance to dive, which has kept the P/S suppressed. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Do Revenue Forecasts Match The Low P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as depressed as Guangdong Transtek Medical Electronics' is when the company's growth is on track to lag the industry decidedly.

Taking a look back first, we see that the company managed to grow revenues by a handy 9.9% last year. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 41% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Shifting to the future, estimates from the two analysts covering the company suggest revenue should grow by 31% over the next year. That's shaping up to be materially higher than the 28% growth forecast for the broader industry.

In light of this, it's peculiar that Guangdong Transtek Medical Electronics' P/S sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Final Word

Even after such a strong price move, Guangdong Transtek Medical Electronics' P/S still trails the rest of the industry. 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.

To us, it seems Guangdong Transtek Medical Electronics currently trades on a significantly depressed P/S given its forecasted revenue growth is higher than the rest of its industry. There could be some major risk factors that are placing downward pressure on the P/S ratio. It appears the market could be anticipating revenue instability, because these conditions should normally provide a boost to the share price.

Before you settle on your opinion, we've discovered 2 warning signs for Guangdong Transtek Medical Electronics (1 makes us a bit uncomfortable!) that you should be aware of.

If these risks are making you reconsider your opinion on Guangdong Transtek Medical Electronics, explore our interactive list of high quality stocks to get an idea of what else is out there.

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