Those holding Shenzhen Fine Made Electronics Group Co., Ltd. (SZSE:300671) shares would be relieved that the share price has rebounded 27% 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 46% over that time.

Since its price has surged higher, Shenzhen Fine Made Electronics Group's price-to-sales (or "P/S") ratio of 8.2x might make it look like a sell right now compared to the wider Semiconductor industry in China, where around half of the companies have P/S ratios below 6.6x and even P/S below 3x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

How Has Shenzhen Fine Made Electronics Group Performed Recently?

As an illustration, revenue has deteriorated at Shenzhen Fine Made Electronics Group 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. If not, then existing shareholders may be quite nervous about the viability of the share price.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Shenzhen Fine Made Electronics Group's to be considered reasonable.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 13%. Unfortunately, that's brought it right back to where it started three years ago with revenue growth being virtually non-existent overall during that time. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 20,706% shows it's an unpleasant look.

With this in mind, we find it worrying that Shenzhen Fine Made Electronics Group's P/S exceeds that of its industry peers. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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

Shenzhen Fine Made Electronics Group shares have taken a big step in a northerly direction, but its P/S is elevated as a result. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Shenzhen Fine Made Electronics Group currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Shenzhen Fine Made Electronics Group that you should be aware of.

If these risks are making you reconsider your opinion on Shenzhen Fine Made Electronics Group, explore our interactive list of high quality stocks to get an idea of what else is out there.

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