Ningbo GQY Video & Telecom Joint-Stock Co., Ltd. (SZSE:300076) shareholders would be excited to see that the share price has had a great month, posting a 25% 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 19% over that time.

Since its price has surged higher, you could be forgiven for thinking Ningbo GQY Video & Telecom is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 10.7x, considering almost half the companies in China's Electronic industry have P/S ratios below 3.3x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

What Does Ningbo GQY Video & Telecom's P/S Mean For Shareholders?

For instance, Ningbo GQY Video & Telecom's receding revenue in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, 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 Ningbo GQY Video & Telecom's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Ningbo GQY Video & Telecom's is when the company's growth is on track to outshine the industry decidedly.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 6.9%. This means it has also seen a slide in revenue over the longer-term as revenue is down 17% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 26% shows it's an unpleasant look.

In light of this, it's alarming that Ningbo GQY Video & Telecom's P/S sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What Does Ningbo GQY Video & Telecom's P/S Mean For Investors?

Shares in Ningbo GQY Video & Telecom have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

Our examination of Ningbo GQY Video & Telecom revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Ningbo GQY Video & Telecom, and understanding should be part of your investment process.

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

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