Shenghua Lande Scitech Limited (HKG:8106) shares have continued their recent momentum with a 32% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 43%.

In spite of the firm bounce in price, there still wouldn't be many who think Shenghua Lande Scitech's price-to-sales (or "P/S") ratio of 0.3x is worth a mention when the median P/S in Hong Kong's Electronic industry is similar at about 0.4x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

What Does Shenghua Lande Scitech's P/S Mean For Shareholders?

Recent times have been quite advantageous for Shenghua Lande Scitech as its revenue has been rising very briskly. Perhaps the market is expecting future revenue performance to taper off, which has kept the P/S from rising. 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 not quite in favour.

Is There Some Revenue Growth Forecasted For Shenghua Lande Scitech?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Shenghua Lande Scitech's to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 32%. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 31% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 22% shows it's an unpleasant look.

In light of this, it's somewhat alarming that Shenghua Lande Scitech's P/S sits in line with 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. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

The Key Takeaway

Its shares have lifted substantially and now Shenghua Lande Scitech's P/S is back within range of the industry median. 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.

The fact that Shenghua Lande Scitech currently trades at a P/S on par with the rest of the industry is surprising to us since its recent revenues have been in decline over the medium-term, all while the industry is set to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Shenghua Lande Scitech that you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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