Suzhou Centec Communications Co., Ltd. (SHSE:688702) shareholders are no doubt pleased to see that the share price has bounced 33% in the last month, although it is still struggling to make up recently lost ground. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Since its price has surged higher, Suzhou Centec Communications may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 16.7x, when you consider almost half of the companies in the Semiconductor industry in China have P/S ratios under 6.6x and even P/S lower than 3x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

What Does Suzhou Centec Communications' P/S Mean For Shareholders?

Suzhou Centec Communications certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Suzhou Centec Communications' to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 35% last year. Pleasingly, revenue has also lifted 293% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the two analysts covering the company suggest revenue should grow by 24% each year over the next three years. Meanwhile, the rest of the industry is forecast to expand by 31% per year, which is noticeably more attractive.

In light of this, it's alarming that Suzhou Centec Communications' P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. 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.

What We Can Learn From Suzhou Centec Communications' P/S?

Suzhou Centec Communications' P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

It comes as a surprise to see Suzhou Centec Communications trade at such a high P/S given the revenue forecasts look less than stellar. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. At these price levels, investors should remain cautious, particularly if things don't improve.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Suzhou Centec Communications, and understanding should be part of your investment process.

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.