Despite an already strong run, Shenzhen Center Power Tech. Co., Ltd (SZSE:002733) shares have been powering on, with a gain of 35% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 28% in the last year.

In spite of the firm bounce in price, there still wouldn't be many who think Shenzhen Center Power Tech's price-to-sales (or "P/S") ratio of 2.2x is worth a mention when it essentially matches the median P/S in China's Electrical industry. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

How Shenzhen Center Power Tech Has Been Performing

As an illustration, revenue has deteriorated at Shenzhen Center Power Tech over the last year, which is not ideal at all. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

How Is Shenzhen Center Power Tech's Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Shenzhen Center Power Tech's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 22% decrease to the company's top line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 6.1% overall rise in revenue. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

This is in contrast to the rest of the industry, which is expected to grow by 25% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it interesting that Shenzhen Center Power Tech is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What Does Shenzhen Center Power Tech's P/S Mean For Investors?

Shenzhen Center Power Tech's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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 Shenzhen Center Power Tech revealed its poor three-year revenue trends aren't resulting in a lower P/S as per our expectations, given they look worse than current industry outlook. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. Unless the recent medium-term conditions improve, it's hard to accept the current share price as fair value.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with Shenzhen Center Power Tech (at least 1 which makes us a bit uncomfortable), and understanding them should be part of your investment process.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.