Unfortunately for some shareholders, the Smartgiant Technology Co., Ltd. (SHSE:688115) share price has dived 29% in the last thirty days, prolonging recent pain. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 55% loss during that time.

Even after such a large drop in price, you could still be forgiven for thinking Smartgiant Technology is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 7x, considering almost half the companies in China's Electronic industry have P/S ratios below 3.5x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

How Has Smartgiant Technology Performed Recently?

For instance, Smartgiant Technology's receding revenue in recent times would have to be some food for thought. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. If not, then existing shareholders may be quite nervous about the viability of the share price.

How Is Smartgiant Technology's Revenue Growth Trending?

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

Retrospectively, the last year delivered a frustrating 31% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 11% 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 23% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Smartgiant Technology's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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.

The Key Takeaway

A significant share price dive has done very little to deflate Smartgiant Technology's very lofty P/S. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Smartgiant Technology currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

It is also worth noting that we have found 4 warning signs for Smartgiant Technology (2 are concerning!) that you need to take into consideration.

If these risks are making you reconsider your opinion on Smartgiant Technology, 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.