Those holding Guizhou Changzheng Tiancheng Holding Co.,Ltd. (SHSE:600112) shares would be relieved that the share price has rebounded 36% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 43% over that time.

Following the firm bounce 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 consider Guizhou Changzheng Tiancheng HoldingLtd as a stock to avoid entirely with its 8.2x 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.

How Has Guizhou Changzheng Tiancheng HoldingLtd Performed Recently?

For example, consider that Guizhou Changzheng Tiancheng HoldingLtd's financial performance has been pretty ordinary lately as revenue growth is non-existent. One possibility is that the P/S is high because investors think the benign revenue growth will improve 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.

How Is Guizhou Changzheng Tiancheng HoldingLtd's Revenue Growth Trending?

In order to justify its P/S ratio, Guizhou Changzheng Tiancheng HoldingLtd would need to produce outstanding growth that's well in excess of the industry.

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. Whilst it's an improvement, it wasn't enough to get the company out of the hole it was in, with revenue down 29% overall from three years ago. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 26% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this information, we find it concerning that Guizhou Changzheng Tiancheng HoldingLtd is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Final Word

Guizhou Changzheng Tiancheng HoldingLtd's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

We've established that Guizhou Changzheng Tiancheng HoldingLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Guizhou Changzheng Tiancheng HoldingLtd with six simple checks on some of these key factors.

If you're unsure about the strength of Guizhou Changzheng Tiancheng HoldingLtd's 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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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.