Center International Group Co.,Ltd. (SHSE:603098) shares have continued their recent momentum with a 27% gain in the last month alone. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 29% over that time.

Following the firm bounce in price, given close to half the companies operating in China's Construction industry have price-to-sales ratios (or "P/S") below 1.2x, you may consider Center International GroupLtd as a stock to potentially avoid with its 2.4x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

How Has Center International GroupLtd Performed Recently?

As an illustration, revenue has deteriorated at Center International GroupLtd over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S 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?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Center International GroupLtd's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 37% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 13% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 15% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that Center International GroupLtd is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Final Word

The large bounce in Center International GroupLtd's shares has lifted the company's P/S handsomely. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Center International GroupLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Plus, you should also learn about these 2 warning signs we've spotted with Center International GroupLtd (including 1 which is significant).

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.