It's not a stretch to say that Suzhou Shijia Science & Technology Inc.'s (SZSE:002796) price-to-sales (or "P/S") ratio of 3.1x right now seems quite "middle-of-the-road" for companies in the Machinery industry in China, where the median P/S ratio is around 3.2x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

What Does Suzhou Shijia Science & Technology's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Suzhou Shijia Science & Technology over the last year, which is not ideal at all. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

Is There Some Revenue Growth Forecasted For Suzhou Shijia Science & Technology?

In order to justify its P/S ratio, Suzhou Shijia Science & Technology would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a frustrating 3.5% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 22% 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 25% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's somewhat alarming that Suzhou Shijia Science & Technology's P/S sits in line with the majority of other companies. 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.

The Key Takeaway

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.

We find it unexpected that Suzhou Shijia Science & Technology trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected 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. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

You should always think about risks. Case in point, we've spotted 1 warning sign for Suzhou Shijia Science & Technology you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.