The Suzhou Centec Communications Co., Ltd. (SHSE:688702) share price has fared very poorly over the last month, falling by a substantial 26%. Longer-term shareholders will rue the drop in the share price, since it's now virtually flat for the year after a promising few quarters.

Even after such a large drop in price, Suzhou Centec Communications may still be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 14.1x, since almost half of all companies in the Semiconductor industry in China have P/S ratios under 6.4x and even P/S lower than 3x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for Suzhou Centec Communications

How Has Suzhou Centec Communications Performed Recently?

Suzhou Centec Communications certainly has been doing a good job lately as it's been growing revenue more than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. However, if this isn't the case, investors might get caught out paying too much for the stock.

How Is Suzhou Centec Communications' Revenue Growth Trending?

In order to justify its P/S ratio, Suzhou Centec Communications would need to produce outstanding growth that's well in excess of the industry.

Taking a look back first, we see that the company grew revenue by an impressive 58% last year. Spectacularly, three year revenue growth has ballooned by several orders of magnitude, thanks in part to the last 12 months of revenue growth. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 21% per annum as estimated by the only analyst watching the company. That's shaping up to be materially lower than the 29% each year growth forecast for the broader industry.

In light of this, it's alarming that Suzhou Centec Communications' P/S sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Bottom Line On Suzhou Centec Communications' P/S

A significant share price dive has done very little to deflate Suzhou Centec Communications' very lofty P/S. 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.

We've concluded that Suzhou Centec Communications currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. At these price levels, investors should remain cautious, particularly if things don't improve.

Before you take the next step, you should know about the 2 warning signs for Suzhou Centec Communications (1 is a bit unpleasant!) that we have uncovered.

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

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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.