Shanghai Morn Electric Equipment Co., Ltd. (SZSE:002451) shareholders won't be pleased to see that the share price has had a very rough month, dropping 26% and undoing the prior period's positive performance. Longer-term, the stock has been solid despite a difficult 30 days, gaining 18% in the last year.

In spite of the heavy fall in price, it's still not a stretch to say that Shanghai Morn Electric Equipment's price-to-sales (or "P/S") ratio of 2.8x right now seems quite "middle-of-the-road" compared to the Electrical industry in China, where the median P/S ratio is around 2.5x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

See our latest analysis for Shanghai Morn Electric Equipment

How Shanghai Morn Electric Equipment Has Been Performing

As an illustration, revenue has deteriorated at Shanghai Morn Electric Equipment over the last year, which is not ideal at all. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

How Is Shanghai Morn Electric Equipment's Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like Shanghai Morn Electric Equipment's is when the company's growth is tracking the industry closely.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 3.2%. Even so, admirably revenue has lifted 180% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

When compared to the industry's one-year growth forecast of 30%, the most recent medium-term revenue trajectory is noticeably more alluring

In light of this, it's curious that Shanghai Morn Electric Equipment's P/S sits in line with the majority of other companies. It may be that most investors are not convinced the company can maintain its recent growth rates.

The Key Takeaway

Following Shanghai Morn Electric Equipment's share price tumble, its P/S is just clinging on to the industry median P/S. 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.

To our surprise, Shanghai Morn Electric Equipment revealed its three-year revenue trends aren't contributing to its P/S as much as we would have predicted, given they look better than current industry expectations. It'd be fair to assume that potential risks the company faces could be the contributing factor to the lower than expected P/S. At least the risk of a price drop looks to be subdued if recent medium-term revenue trends continue, but investors seem to think future revenue could see some volatility.

And what about other risks? Every company has them, and we've spotted 4 warning signs for Shanghai Morn Electric Equipment (of which 2 are significant!) you should know about.

If you're unsure about the strength of Shanghai Morn Electric Equipment's 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.