Shenzhen Fine Made Electronics Group Co., Ltd. (SZSE:300671) shares have continued their recent momentum with a 32% gain in the last month alone. Notwithstanding the latest gain, the annual share price return of 8.0% isn't as impressive.

Since its price has surged higher, Shenzhen Fine Made Electronics Group may be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 11.6x, since almost half of all companies in the Semiconductor industry in China have P/S ratios under 5.4x and even P/S lower than 2x are not unusual. 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 Shenzhen Fine Made Electronics Group's P/S Mean For Shareholders?

Shenzhen Fine Made Electronics Group has been doing a decent job lately as it's been growing revenue at a reasonable pace. One possibility is that the P/S ratio is high because investors think this good revenue growth will be enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as steep as Shenzhen Fine Made Electronics Group's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered a decent 3.8% gain to the company's revenues. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 53% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 36% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's alarming that Shenzhen Fine Made Electronics Group'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 We Can Learn From Shenzhen Fine Made Electronics Group's P/S?

Shares in Shenzhen Fine Made Electronics Group have seen a strong upwards swing lately, which has really helped boost its P/S figure. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Shenzhen Fine Made Electronics Group currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Shenzhen Fine Made Electronics Group that you should be aware of.

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

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