Shenzhen Etmade Automatic Equipment Co., Ltd. (SZSE:300812) shareholders won't be pleased to see that the share price has had a very rough month, dropping 26% and undoing the prior period's positive performance. Longer-term, the stock has been solid despite a difficult 30 days, gaining 20% in the last year.

Even after such a large drop in price, you could still be forgiven for feeling indifferent about Shenzhen Etmade Automatic Equipment's P/S ratio of 5.4x, since the median price-to-sales (or "P/S") ratio for the Semiconductor industry in China is also close to 5.9x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

How Has Shenzhen Etmade Automatic Equipment Performed Recently?

Shenzhen Etmade Automatic Equipment has been doing a decent job lately as it's been growing revenue at a reasonable pace. It might be that many expect the respectable revenue performance to only match most other companies over the coming period, which has kept the P/S from rising. Those who are bullish on Shenzhen Etmade Automatic Equipment will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

How Is Shenzhen Etmade Automatic Equipment's Revenue Growth Trending?

In order to justify its P/S ratio, Shenzhen Etmade Automatic Equipment would need to produce growth that's similar to the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 3.2% last year. The latest three year period has also seen an excellent 53% overall rise in revenue, aided somewhat by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 35% 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 Etmade Automatic Equipment is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Final Word

With its share price dropping off a cliff, the P/S for Shenzhen Etmade Automatic Equipment looks to be in line with the rest of the Semiconductor industry. 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.

Our examination of Shenzhen Etmade Automatic Equipment 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 there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Shenzhen Etmade Automatic Equipment (3 are a bit concerning) you should be aware of.

If you're unsure about the strength of Shenzhen Etmade Automatic Equipment'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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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.