Wanma Technology Co., Ltd. (SZSE:300698) shareholders would be excited to see that the share price has had a great month, posting a 57% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 41% in the last year.

Following the firm bounce in price, Wanma Technology may be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 12.7x, since almost half of all companies in the Communications industry in China have P/S ratios under 4.6x and even P/S lower than 2x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

How Wanma Technology Has Been Performing

Recent times haven't been great for Wanma Technology as its revenue has been rising slower than most other companies. It might be that many expect the uninspiring revenue performance to recover significantly, which has kept the P/S ratio from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as steep as Wanma Technology's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered a decent 10.0% gain to the company's revenues. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 13% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 41% during the coming year according to the three analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 43%, which is not materially different.

In light of this, it's curious that Wanma Technology's P/S sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

Shares in Wanma Technology have seen a strong upwards swing lately, which has really helped boost its P/S figure. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Analysts are forecasting Wanma Technology's revenues to only grow on par with the rest of the industry, which has lead to the high P/S ratio being unexpected. The fact that the revenue figures aren't setting the world alight has us doubtful that the company's elevated P/S can be sustainable for the long term. A positive change is needed in order to justify the current price-to-sales ratio.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Wanma Technology (1 makes us a bit uncomfortable) you should be aware of.

If you're unsure about the strength of Wanma 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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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.