Dongguan Chitwing Technology Co., Ltd. (SZSE:002855) shares have had a horrible month, losing 33% after a relatively good period beforehand. The good news is that in the last year, the stock has shone bright like a diamond, gaining 133%.

Even after such a large drop in price, you could still be forgiven for thinking Dongguan Chitwing Technology is a stock not worth researching with a price-to-sales ratios (or "P/S") of 3x, considering almost half the companies in China's Machinery industry have P/S ratios below 2.3x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

How Dongguan Chitwing Technology Has Been Performing

As an illustration, revenue has deteriorated at Dongguan Chitwing Technology over the last year, which is not ideal at all. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Is There Enough Revenue Growth Forecasted For Dongguan Chitwing Technology?

The only time you'd be truly comfortable seeing a P/S as high as Dongguan Chitwing Technology's is when the company's growth is on track to outshine the industry.

Retrospectively, the last year delivered a frustrating 31% decrease to the company's top line. As a result, revenue from three years ago have also fallen 25% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 27% shows it's an unpleasant look.

With this in mind, we find it worrying that Dongguan Chitwing Technology's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate 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 Dongguan Chitwing Technology's P/S Mean For Investors?

Dongguan Chitwing Technology's P/S remain high even after its stock plunged. 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 Dongguan Chitwing Technology revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. 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.

You should always think about risks. Case in point, we've spotted 3 warning signs for Dongguan Chitwing Technology you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.