Shanghai Highly (Group) Co., Ltd. (SHSE:600619) shareholders have had their patience rewarded with a 69% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 33% in the last year.

Although its price has surged higher, Shanghai Highly (Group) may still look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 0.5x, considering almost half of all companies in the Machinery industry in China have P/S ratios greater than 2.5x and even P/S higher than 5x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

How Shanghai Highly (Group) Has Been Performing

The revenue growth achieved at Shanghai Highly (Group) over the last year would be more than acceptable for most companies. Perhaps the market is expecting this acceptable revenue performance to take a dive, which has kept the P/S suppressed. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Do Revenue Forecasts Match The Low P/S Ratio?

In order to justify its P/S ratio, Shanghai Highly (Group) would need to produce anemic growth that's substantially trailing the industry.

Retrospectively, the last year delivered a decent 9.9% gain to the company's revenues. Pleasingly, revenue has also lifted 32% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 23% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Shanghai Highly (Group) is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

What Does Shanghai Highly (Group)'s P/S Mean For Investors?

Even after such a strong price move, Shanghai Highly (Group)'s P/S still trails the rest of the industry. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

In line with expectations, Shanghai Highly (Group) maintains its low P/S on the weakness of its recent three-year growth being lower than the wider industry forecast. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

You should always think about risks. Case in point, we've spotted 3 warning signs for Shanghai Highly (Group) you should be aware of, and 1 of them is potentially serious.

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.

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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.