Suzhou Yangtze New Materials Co., Ltd. (SZSE:002652) shareholders have had their patience rewarded with a 28% share price jump in the last month. Unfortunately, despite the strong performance over the last month, the full year gain of 8.5% isn't as attractive.

Following the firm bounce in price, you could be forgiven for thinking Suzhou Yangtze New Materials is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 5x, considering almost half the companies in China's Packaging industry have P/S ratios below 2.1x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

How Suzhou Yangtze New Materials Has Been Performing

As an illustration, revenue has deteriorated at Suzhou Yangtze New Materials over the last year, which is not ideal at all. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

How Is Suzhou Yangtze New Materials' Revenue Growth Trending?

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

Retrospectively, the last year delivered a frustrating 18% decrease to the company's top line. As a result, revenue from three years ago have also fallen 48% overall. 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 15% 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 Suzhou Yangtze New Materials' 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 heavily on the share price eventually.

What We Can Learn From Suzhou Yangtze New Materials' P/S?

The strong share price surge has lead to Suzhou Yangtze New Materials' P/S soaring as well. 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.

We've established that Suzhou Yangtze New Materials 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.

You should always think about risks. Case in point, we've spotted 2 warning signs for Suzhou Yangtze New Materials you should be aware of, and 1 of them shouldn't be ignored.

If these risks are making you reconsider your opinion on Suzhou Yangtze New Materials, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.