Linktel Technologies Co., Ltd. (SZSE:301205) shares have retraced a considerable 30% in the last month, reversing a fair amount of their solid recent performance. The good news is that in the last year, the stock has shone bright like a diamond, gaining 211%.

In spite of the heavy fall in price, you could still be forgiven for thinking Linktel Technologies is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 14.6x, considering almost half the companies in China's Electronic industry have P/S ratios below 3.3x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

View our latest analysis for Linktel Technologies

How Linktel Technologies Has Been Performing

For instance, Linktel Technologies' receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

What Are Revenue Growth Metrics Telling Us About The High P/S?

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

Retrospectively, the last year delivered a frustrating 22% decrease to the company's top line. Regardless, revenue has managed to lift by a handy 25% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 61% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this information, we find it concerning that Linktel Technologies is trading at a P/S higher than the industry. It seems most investors are ignoring the fairly limited recent growth rates 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 heavily on the share price eventually.

What Does Linktel Technologies' P/S Mean For Investors?

A significant share price dive has done very little to deflate Linktel Technologies' very lofty 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.

The fact that Linktel Technologies 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 is also worth noting that we have found 3 warning signs for Linktel Technologies (1 makes us a bit uncomfortable!) that you need to take into consideration.

If you're unsure about the strength of Linktel Technologies' 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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