To the annoyance of some shareholders, Changshu Tianyin Electromechanical Co.,Ltd (SZSE:300342) shares are down a considerable 29% in the last month, which continues a horrid run for the company. Still, a bad month hasn't completely ruined the past year with the stock gaining 25%, which is great even in a bull market.

Even after such a large drop in price, given around half the companies in China's Electrical industry have price-to-sales ratios (or "P/S") below 2.1x, you may still consider Changshu Tianyin ElectromechanicalLtd as a stock to avoid entirely with its 5.1x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for Changshu Tianyin ElectromechanicalLtd

What Does Changshu Tianyin ElectromechanicalLtd's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Changshu Tianyin ElectromechanicalLtd over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.

How Is Changshu Tianyin ElectromechanicalLtd's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Changshu Tianyin ElectromechanicalLtd's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered a frustrating 7.4% decrease to the company's top line. At least revenue has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Comparing that to the industry, which is predicted to deliver 29% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

In light of this, it's alarming that Changshu Tianyin ElectromechanicalLtd's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What Does Changshu Tianyin ElectromechanicalLtd's P/S Mean For Investors?

Even after such a strong price drop, Changshu Tianyin ElectromechanicalLtd's P/S still exceeds the industry median significantly. 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.

The fact that Changshu Tianyin ElectromechanicalLtd currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with Changshu Tianyin ElectromechanicalLtd (at least 1 which can't be ignored), and understanding these should be part of your investment process.

If these risks are making you reconsider your opinion on Changshu Tianyin ElectromechanicalLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.