Ningbo GQY Video & Telecom Joint-Stock Co., Ltd. (SZSE:300076) shareholders are no doubt pleased to see that the share price has bounced 32% in the last month, although it is still struggling to make up recently lost ground. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 23% over that time.

Following the firm bounce in price, when almost half of the companies in China's Electronic industry have price-to-sales ratios (or "P/S") below 3.7x, you may consider Ningbo GQY Video & Telecom as a stock not worth researching with its 9.7x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

How Ningbo GQY Video & Telecom Has Been Performing

With revenue growth that's exceedingly strong of late, Ningbo GQY Video & Telecom has been doing very well. 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

How Is Ningbo GQY Video & Telecom's Revenue Growth Trending?

In order to justify its P/S ratio, Ningbo GQY Video & Telecom would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered an exceptional 94% gain to the company's top line. Pleasingly, revenue has also lifted 48% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 25% shows it's noticeably less attractive.

In light of this, it's alarming that Ningbo GQY Video & Telecom's P/S sits above the majority of other companies. 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 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.

What Does Ningbo GQY Video & Telecom's P/S Mean For Investors?

The strong share price surge has lead to Ningbo GQY Video & Telecom's P/S soaring as well. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

The fact that Ningbo GQY Video & Telecom currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. 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 Ningbo GQY Video & Telecom, and understanding these should be part of your investment process.

If you're unsure about the strength of Ningbo GQY Video & Telecom'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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