Despite an already strong run, Ningbo GQY Video & Telecom Joint-Stock Co., Ltd. (SZSE:300076) shares have been powering on, with a gain of 37% in the last thirty days. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 4.2% over the last year.

Following the firm bounce in price, Ningbo GQY Video & Telecom may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 15.9x, when you consider almost half of the companies in the Electronic industry in China have P/S ratios under 4x and even P/S lower than 2x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

How Ningbo GQY Video & Telecom Has Been Performing

As an illustration, revenue has deteriorated at Ningbo GQY Video & Telecom over the last year, which is not ideal at all. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

Do Revenue Forecasts Match The High P/S Ratio?

Ningbo GQY Video & Telecom's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered a frustrating 27% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 27% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 26% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's alarming that Ningbo GQY Video & Telecom's P/S sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What Does Ningbo GQY Video & Telecom's P/S Mean For Investors?

Shares in Ningbo GQY Video & Telecom have seen a strong upwards swing lately, which has really helped boost its P/S figure. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our examination of Ningbo GQY Video & Telecom 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. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you take the next step, you should know about the 2 warning signs for Ningbo GQY Video & Telecom (1 is concerning!) that we have uncovered.

If you're unsure about the strength of Ningbo GQY Video & Telecom's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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