Pangaea Connectivity Technology Limited (HKG:1473) shares have had a really impressive month, gaining 32% after a shaky period beforehand. Taking a wider view, although not as strong as the last month, the full year gain of 10% is also fairly reasonable.

Even after such a large jump in price, there still wouldn't be many who think Pangaea Connectivity Technology's price-to-sales (or "P/S") ratio of 0.2x is worth a mention when the median P/S in Hong Kong's Electronic industry is similar at about 0.4x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

What Does Pangaea Connectivity Technology's Recent Performance Look Like?

Pangaea Connectivity Technology has been doing a good job lately as it's been growing revenue at a solid pace. Perhaps the market is expecting future revenue performance to only keep up with the broader industry, which has keeping the P/S in line with expectations. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

Do Revenue Forecasts Match The P/S Ratio?

Pangaea Connectivity Technology's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

Taking a look back first, we see that the company grew revenue by an impressive 15% last year. Still, revenue has fallen 11% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 23% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we find it worrying that Pangaea Connectivity 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 on the share price eventually.

What We Can Learn From Pangaea Connectivity Technology's P/S?

Its shares have lifted substantially and now Pangaea Connectivity Technology's P/S is back within range of the industry median. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our look at Pangaea Connectivity Technology revealed its shrinking revenues over the medium-term haven't impacted the P/S as much as we anticipated, given the industry is set to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Plus, you should also learn about these 5 warning signs we've spotted with Pangaea Connectivity Technology (including 1 which doesn't sit too well with us).

If you're unsure about the strength of Pangaea Connectivity Technology's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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