Zhejiang Yiming Food Co., Ltd. (SHSE:605179) shares have had a really impressive month, gaining 28% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 33%.

Although its price has surged higher, there still wouldn't be many who think Zhejiang Yiming Food's price-to-sales (or "P/S") ratio of 2.2x is worth a mention when the median P/S in China's Food industry is similar at about 2x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for Zhejiang Yiming Food

What Does Zhejiang Yiming Food's P/S Mean For Shareholders?

With revenue growth that's inferior to most other companies of late, Zhejiang Yiming Food has been relatively sluggish. It might be that many expect the uninspiring revenue performance to strengthen positively, which has kept the P/S ratio from falling. However, if this isn't the case, investors might get caught out paying too much for the stock.

Is There Some Revenue Growth Forecasted For Zhejiang Yiming Food?

The only time you'd be comfortable seeing a P/S like Zhejiang Yiming Food's is when the company's growth is tracking the industry closely.

If we review the last year of revenue growth, the company posted a worthy increase of 5.9%. This was backed up an excellent period prior to see revenue up by 32% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the sole analyst covering the company suggest revenue should grow by 14% over the next year. That's shaping up to be materially lower than the 17% growth forecast for the broader industry.

With this in mind, we find it intriguing that Zhejiang Yiming Food's P/S is closely matching its industry peers. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Final Word

Its shares have lifted substantially and now Zhejiang Yiming Food's P/S is back within range of the industry median. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

When you consider that Zhejiang Yiming Food's revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Zhejiang Yiming Food with six simple checks will allow you to discover any risks that could be an issue.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.