Those holding Suzhou Electrical Apparatus Science Academy Co., Ltd. (SZSE:300215) shares would be relieved that the share price has rebounded 32% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 22% in the last twelve months.

Following the firm bounce in price, given around half the companies in China's Professional Services industry have price-to-sales ratios (or "P/S") below 2.9x, you may consider Suzhou Electrical Apparatus Science Academy as a stock to avoid entirely with its 5.6x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

How Suzhou Electrical Apparatus Science Academy Has Been Performing

As an illustration, revenue has deteriorated at Suzhou Electrical Apparatus Science Academy over the last year, which is not ideal at all. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Is There Enough Revenue Growth Forecasted For Suzhou Electrical Apparatus Science Academy?

In order to justify its P/S ratio, Suzhou Electrical Apparatus Science Academy would need to produce outstanding growth that's well in excess of the industry.

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 21%. As a result, revenue from three years ago have also fallen 20% overall. 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 91% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we find it worrying that Suzhou Electrical Apparatus Science Academy'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.

The Bottom Line On Suzhou Electrical Apparatus Science Academy's P/S

The strong share price surge has lead to Suzhou Electrical Apparatus Science Academy's P/S soaring as well. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We've established that Suzhou Electrical Apparatus Science Academy 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. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Before you take the next step, you should know about the 1 warning sign for Suzhou Electrical Apparatus Science Academy that we have uncovered.

If you're unsure about the strength of Suzhou Electrical Apparatus Science Academy'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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