Shenwu Energy Saving Co., Ltd. (SZSE:000820) shareholders that were waiting for something to happen have been dealt a blow with a 27% share price drop in the last month. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 37% share price drop.

Even after such a large drop in price, you could still be forgiven for thinking Shenwu Energy Saving is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 10.5x, considering almost half the companies in China's Commercial Services industry have P/S ratios below 2.3x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

How Shenwu Energy Saving Has Been Performing

Recent times have been quite advantageous for Shenwu Energy Saving as its revenue has been rising very briskly. It seems that many are expecting the strong revenue performance to beat most other companies over the coming period, which has increased investors' willingness to pay up for the stock. However, if this isn't the case, investors might get caught out paying too much for the stock.

How Is Shenwu Energy Saving's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Shenwu Energy Saving's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 33% gain to the company's top line. The latest three year period has also seen an incredible overall rise in revenue, aided by its incredible short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

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

In light of this, it's understandable that Shenwu Energy Saving's P/S sits above the majority of other companies. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the wider industry.

The Bottom Line On Shenwu Energy Saving's P/S

Even after such a strong price drop, Shenwu Energy Saving's P/S still exceeds the industry median significantly. 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.

As we suspected, our examination of Shenwu Energy Saving revealed its three-year revenue trends are contributing to its high P/S, given they look better than current industry expectations. In the eyes of shareholders, the probability of a continued growth trajectory is great enough to prevent the P/S from pulling back. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

You should always think about risks. Case in point, we've spotted 1 warning sign for Shenwu Energy Saving you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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