Zhejiang Tianzhen Technology Co., Ltd. (SZSE:301356) shareholders would be excited to see that the share price has had a great month, posting a 35% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 28% over that time.

Following the firm bounce in price, given around half the companies in China's Building industry have price-to-sales ratios (or "P/S") below 1.8x, you may consider Zhejiang Tianzhen Technology as a stock to avoid entirely with its 6.1x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

How Zhejiang Tianzhen Technology Has Been Performing

Zhejiang Tianzhen Technology has been struggling lately as its revenue has declined faster than most other companies. It might be that many expect the dismal revenue performance to recover substantially, which has kept the P/S from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.

How Is Zhejiang Tianzhen Technology's Revenue Growth Trending?

In order to justify its P/S ratio, Zhejiang Tianzhen Technology would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a frustrating 77% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 69% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Shifting to the future, estimates from the only analyst covering the company suggest revenue should grow by 339% over the next year. Meanwhile, the rest of the industry is forecast to only expand by 25%, which is noticeably less attractive.

With this information, we can see why Zhejiang Tianzhen Technology is trading at such a high P/S compared to the industry. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Zhejiang Tianzhen Technology's P/S

Zhejiang Tianzhen Technology's P/S has grown nicely over the last month thanks to a handy boost in the share price. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that Zhejiang Tianzhen Technology maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Building industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Zhejiang Tianzhen Technology that you should be aware of.

If these risks are making you reconsider your opinion on Zhejiang Tianzhen Technology, 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.