You may think that with a price-to-sales (or "P/S") ratio of 6.4x Chengdu Spaceon Electronics Co., Ltd. (SZSE:002935) is a stock to potentially avoid, seeing as almost half of all the Communications companies in China have P/S ratios under 5.2x and even P/S lower than 2x aren't out of the ordinary. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

How Chengdu Spaceon Electronics Has Been Performing

Chengdu Spaceon Electronics hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

How Is Chengdu Spaceon Electronics' Revenue Growth Trending?

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

Retrospectively, the last year delivered a frustrating 20% decrease to the company's top line. At least revenue has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

Turning to the outlook, the next year should generate growth of 43% as estimated by the lone analyst watching the company. With the industry only predicted to deliver 35%, the company is positioned for a stronger revenue result.

With this information, we can see why Chengdu Spaceon Electronics is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

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.

We've established that Chengdu Spaceon Electronics maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Communications industry, as expected. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Plus, you should also learn about this 1 warning sign we've spotted with Chengdu Spaceon Electronics.

If these risks are making you reconsider your opinion on Chengdu Spaceon Electronics, 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.