Unfortunately for some shareholders, the Guangxi Oriental Intelligent Manufacturing Technology Co., Ltd. (SZSE:002175) share price has dived 27% in the last thirty days, prolonging recent pain. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 47% in that time.

Even after such a large drop in price, given around half the companies in China's Electronic industry have price-to-sales ratios (or "P/S") below 3.4x, you may still consider Guangxi Oriental Intelligent Manufacturing Technology as a stock to avoid entirely with its 10.4x P/S ratio. 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.

What Does Guangxi Oriental Intelligent Manufacturing Technology's P/S Mean For Shareholders?

For example, consider that Guangxi Oriental Intelligent Manufacturing Technology's financial performance has been poor lately as its revenue has been in decline. 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. If not, then existing shareholders may be quite nervous about the viability of the share price.

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

In order to justify its P/S ratio, Guangxi Oriental Intelligent Manufacturing Technology would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a frustrating 12% decrease to the company's top line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 21% overall rise in revenue. 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 the recent medium-term revenue trends against the industry's one-year growth forecast of 60% shows it's noticeably less attractive.

With this in mind, we find it worrying that Guangxi Oriental Intelligent Manufacturing Technology's P/S exceeds that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Bottom Line On Guangxi Oriental Intelligent Manufacturing Technology's P/S

A significant share price dive has done very little to deflate Guangxi Oriental Intelligent Manufacturing Technology's 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.

Our examination of Guangxi Oriental Intelligent Manufacturing Technology revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Guangxi Oriental Intelligent Manufacturing Technology (at least 1 which shouldn't be ignored), and understanding these should be part of your investment process.

If these risks are making you reconsider your opinion on Guangxi Oriental Intelligent Manufacturing Technology, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.