Unfortunately for some shareholders, the Leader Harmonious Drive Systems Co., Ltd. (SHSE:688017) share price has dived 28% in the last thirty days, prolonging recent pain. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 48% in that time.

Although its price has dipped substantially, you could still be forgiven for thinking Leader Harmonious Drive Systems is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 41.8x, considering almost half the companies in China's Machinery industry have P/S ratios below 2.5x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

How Leader Harmonious Drive Systems Has Been Performing

Leader Harmonious Drive Systems could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is Leader Harmonious Drive Systems' Revenue Growth Trending?

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

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 21%. Still, the latest three year period has seen an excellent 34% overall rise in revenue, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Looking ahead now, revenue is anticipated to climb by 49% during the coming year according to the twelve analysts following the company. That's shaping up to be materially higher than the 23% growth forecast for the broader industry.

In light of this, it's understandable that Leader Harmonious Drive Systems' P/S sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Leader Harmonious Drive Systems' P/S?

Even after such a strong price drop, Leader Harmonious Drive Systems' P/S still exceeds the industry median significantly. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We've established that Leader Harmonious Drive Systems maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Machinery industry, as expected. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Having said that, be aware Leader Harmonious Drive Systems is showing 1 warning sign in our investment analysis, you should know about.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.

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