SINOTECH Company Limited (SHSE:688737) shares have continued their recent momentum with a 29% gain in the last month alone. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 43% in the last twelve months.

In spite of the firm bounce in price, SINOTECH may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 1.6x, since almost half of all companies in the Chemicals industry in China have P/S ratios greater than 2.4x and even P/S higher than 5x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

How SINOTECH Has Been Performing

Recent times have been advantageous for SINOTECH as its revenues have been rising faster than most other companies. One possibility is that the P/S ratio is low because investors think this strong revenue performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Do Revenue Forecasts Match The Low P/S Ratio?

There's an inherent assumption that a company should underperform the industry for P/S ratios like SINOTECH's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 17% last year. Revenue has also lifted 16% in aggregate from three years ago, mostly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Turning to the outlook, the next year should generate growth of 80% as estimated by the two analysts watching the company. That's shaping up to be materially higher than the 25% growth forecast for the broader industry.

In light of this, it's peculiar that SINOTECH's P/S sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

What We Can Learn From SINOTECH's P/S?

SINOTECH's stock price has surged recently, but its but its P/S still remains modest. 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.

To us, it seems SINOTECH currently trades on a significantly depressed P/S given its forecasted revenue growth is higher than the rest of its industry. There could be some major risk factors that are placing downward pressure on the P/S ratio. At least price risks look to be very low, but investors seem to think future revenues could see a lot of volatility.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for SINOTECH with six simple checks on some of these key factors.

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

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