Shandong Chiway Industry Development Co.,Ltd (SZSE:002374) shares have had a really impressive month, gaining 25% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 44% over that time.

Since its price has surged higher, you could be forgiven for thinking Shandong Chiway Industry DevelopmentLtd is a stock not worth researching with a price-to-sales ratios (or "P/S") of 3.1x, considering almost half the companies in China's Commercial Services industry have P/S ratios below 2.3x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

What Does Shandong Chiway Industry DevelopmentLtd's Recent Performance Look Like?

For instance, Shandong Chiway Industry DevelopmentLtd'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. However, if this isn't the case, investors might get caught out paying too much for the stock.

Do Revenue Forecasts Match The High P/S Ratio?

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

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 1.9%. Unfortunately, that's brought it right back to where it started three years ago with revenue growth being virtually non-existent overall during that time. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

This is in contrast to the rest of the industry, which is expected to grow by 29% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that Shandong Chiway Industry DevelopmentLtd's P/S sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. 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.

The Bottom Line On Shandong Chiway Industry DevelopmentLtd's P/S

Shandong Chiway Industry DevelopmentLtd shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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.

Our examination of Shandong Chiway Industry DevelopmentLtd revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Shandong Chiway Industry DevelopmentLtd you should know about.

If these risks are making you reconsider your opinion on Shandong Chiway Industry DevelopmentLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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