Zhejiang FORE Intelligent Technology Co.,Ltd (SZSE:301368) shares have continued their recent momentum with a 32% gain in the last month alone. Taking a wider view, although not as strong as the last month, the full year gain of 24% is also fairly reasonable.

Following the firm bounce in price, given around half the companies in China's Machinery industry have price-to-sales ratios (or "P/S") below 3.2x, you may consider Zhejiang FORE Intelligent TechnologyLtd as a stock to avoid entirely with its 14x 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 Zhejiang FORE Intelligent TechnologyLtd Has Been Performing

Revenue has risen firmly for Zhejiang FORE Intelligent 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

What Are Revenue Growth Metrics Telling Us About The High P/S?

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

If we review the last year of revenue growth, the company posted a terrific increase of 22%. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 15% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

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 Zhejiang FORE Intelligent TechnologyLtd's 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 Final Word

Zhejiang FORE Intelligent TechnologyLtd's P/S has grown nicely over the last month thanks to a handy boost in the share price. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Zhejiang FORE Intelligent TechnologyLtd 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. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Plus, you should also learn about these 4 warning signs we've spotted with Zhejiang FORE Intelligent TechnologyLtd (including 2 which can't be ignored).

If you're unsure about the strength of Zhejiang FORE Intelligent TechnologyLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.