When close to half the companies in the Tech industry in China have price-to-sales ratios (or "P/S") below 3.6x, you may consider Shenzhen Longsys Electronics Co., Ltd. (SZSE:301308) as a stock to potentially avoid with its 4.8x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Shenzhen Longsys Electronics

What Does Shenzhen Longsys Electronics' P/S Mean For Shareholders?

Shenzhen Longsys Electronics could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is Shenzhen Longsys Electronics' Revenue Growth Trending?

In order to justify its P/S ratio, Shenzhen Longsys Electronics would need to produce impressive growth in excess of the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 4.8%. Regardless, revenue has managed to lift by a handy 14% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the six analysts covering the company suggest revenue should grow by 33% over the next year. Meanwhile, the rest of the industry is forecast to only expand by 29%, which is noticeably less attractive.

With this in mind, it's not hard to understand why Shenzhen Longsys Electronics' P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

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.

We've established that Shenzhen Longsys Electronics maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Tech industry, as expected. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Shenzhen Longsys Electronics that you should be aware of.

If you're unsure about the strength of Shenzhen Longsys Electronics' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.