Shanghai Belling Co., Ltd. (SHSE:600171) shares have continued their recent momentum with a 52% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 36% in the last year.

After such a large jump in price, Shanghai Belling's price-to-sales (or "P/S") ratio of 7.8x might make it look like a sell right now compared to the wider Semiconductor industry in China, where around half of the companies have P/S ratios below 5.6x and even P/S below 2x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

How Shanghai Belling Has Been Performing

The revenue growth achieved at Shanghai Belling over the last year would be more than acceptable for most companies. One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be enough to outperform the broader industry in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

Is There Enough Revenue Growth Forecasted For Shanghai Belling?

The only time you'd be truly comfortable seeing a P/S as high as Shanghai Belling's is when the company's growth is on track to outshine the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 9.7%. Pleasingly, revenue has also lifted 43% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

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 in mind, we find it worrying that Shanghai Belling's P/S exceeds that of its industry peers. 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. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What Does Shanghai Belling's P/S Mean For Investors?

The large bounce in Shanghai Belling's shares has lifted the company's P/S handsomely. 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.

The fact that Shanghai Belling currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Shanghai Belling that you should be aware of.

If these risks are making you reconsider your opinion on Shanghai Belling, 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com