Shandong Longquan Pipe Industry Co.,Ltd (SZSE:002671) shareholders are no doubt pleased to see that the share price has bounced 26% in the last month, although it is still struggling to make up recently lost ground. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 9.1% in the last twelve months.

Following the firm bounce in price, you could be forgiven for thinking Shandong Longquan Pipe IndustryLtd is a stock not worth researching with a price-to-sales ratios (or "P/S") of 2.4x, considering almost half the companies in China's Basic Materials industry have P/S ratios below 1.3x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

How Shandong Longquan Pipe IndustryLtd Has Been Performing

As an illustration, revenue has deteriorated at Shandong Longquan Pipe IndustryLtd 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. 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?

In order to justify its P/S ratio, Shandong Longquan Pipe IndustryLtd would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered a frustrating 14% decrease to the company's top line. Regardless, revenue has managed to lift by a handy 23% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 20% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

In light of this, it's alarming that Shandong Longquan Pipe IndustryLtd'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 Shandong Longquan Pipe IndustryLtd's P/S Mean For Investors?

The large bounce in Shandong Longquan Pipe IndustryLtd's shares has lifted the company's P/S handsomely. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our examination of Shandong Longquan Pipe IndustryLtd revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. 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 there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

You should always think about risks. Case in point, we've spotted 1 warning sign for Shandong Longquan Pipe IndustryLtd you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.