The Shengyi Electronics Co., Ltd. (SHSE:688183) share price has fared very poorly over the last month, falling by a substantial 25%. The good news is that in the last year, the stock has shone bright like a diamond, gaining 213%.

Even after such a large drop in price, it's still not a stretch to say that Shengyi Electronics' price-to-sales (or "P/S") ratio of 5.7x right now seems quite "middle-of-the-road" compared to the Electronic industry in China, where the median P/S ratio is around 4.8x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

What Does Shengyi Electronics' Recent Performance Look Like?

Shengyi Electronics certainly has been doing a good job lately as it's been growing revenue more than most other companies. Perhaps the market is expecting this level of performance to taper off, keeping the P/S from soaring. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

How Is Shengyi Electronics' Revenue Growth Trending?

In order to justify its P/S ratio, Shengyi Electronics would need to produce growth that's similar to the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 25%. The latest three year period has also seen a 16% overall rise in revenue, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 29% each year during the coming three years according to the dual analysts following the company. Meanwhile, the rest of the industry is forecast to only expand by 17% each year, which is noticeably less attractive.

In light of this, it's curious that Shengyi Electronics' P/S sits in line with the majority of other companies. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Final Word

With its share price dropping off a cliff, the P/S for Shengyi Electronics looks to be in line with the rest of the Electronic industry. 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.

Looking at Shengyi Electronics' analyst forecasts revealed that its superior revenue outlook isn't giving the boost to its P/S that we would've expected. Perhaps uncertainty in the revenue forecasts are what's keeping the P/S ratio consistent with the rest of the industry. It appears some are indeed anticipating revenue instability, because these conditions should normally provide a boost to the share price.

Having said that, be aware Shengyi Electronics is showing 2 warning signs in our investment analysis, and 1 of those can't be ignored.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.