Nanjing Yueboo Power System Co., Ltd. (SZSE:300742) shares have had a horrible month, losing 44% after a relatively good period beforehand. For any long-term shareholders, the last month ends a year to forget by locking in a 69% share price decline.

Although its price has dipped substantially, given close to half the companies operating in China's Auto Components industry have price-to-sales ratios (or "P/S") below 1.8x, you may still consider Nanjing Yueboo Power System as a stock to potentially avoid with its 3.1x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

How Has Nanjing Yueboo Power System Performed Recently?

Nanjing Yueboo Power System has been doing a decent job lately as it's been growing revenue at a reasonable pace. One possibility is that the P/S ratio is high because investors think this good revenue growth will be enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

Do Revenue Forecasts Match The High P/S Ratio?

Nanjing Yueboo Power System's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 4.8% last year. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 58% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 25% 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 Nanjing Yueboo Power System'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.

What Does Nanjing Yueboo Power System's P/S Mean For Investors?

Nanjing Yueboo Power System's P/S remain high even after its stock plunged. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Nanjing Yueboo Power System 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. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

It is also worth noting that we have found 4 warning signs for Nanjing Yueboo Power System (3 are concerning!) that you need to take into consideration.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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