With a price-to-sales (or "P/S") ratio of 7.6x Bestechnic (Shanghai) Co., Ltd. (SHSE:688608) may be sending very bearish signals at the moment, given that almost half of all the Semiconductor companies in China have P/S ratios under 4.9x and even P/S lower than 2x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

How Has Bestechnic (Shanghai) Performed Recently?

With revenue growth that's superior to most other companies of late, Bestechnic (Shanghai) has been doing relatively well. The P/S is probably high because investors think this strong revenue performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

Is There Enough Revenue Growth Forecasted For Bestechnic (Shanghai)?

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

Taking a look back first, we see that the company grew revenue by an impressive 55% last year. Pleasingly, revenue has also lifted 100% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 30% as estimated by the eight analysts watching the company. With the industry predicted to deliver 34% growth, the company is positioned for a weaker revenue result.

With this information, we find it concerning that Bestechnic (Shanghai) is trading at a P/S higher than the industry. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

What We Can Learn From Bestechnic (Shanghai)'s P/S?

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.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Bestechnic (Shanghai), this doesn't appear to be impacting the P/S in the slightest. 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. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Bestechnic (Shanghai) with six simple checks will allow you to discover any risks that could be an issue.

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.