Hangzhou Shenhao Technology Co.,LTD. (SZSE:300853) shareholders are no doubt pleased to see that the share price has bounced 27% in the last month, although it is still struggling to make up recently lost ground. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 21% in the last twelve months.

Since its price has surged higher, you could be forgiven for thinking Hangzhou Shenhao TechnologyLTD is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 6.7x, considering almost half the companies in China's Electronic industry have P/S ratios below 3.9x. 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.

What Does Hangzhou Shenhao TechnologyLTD's Recent Performance Look Like?

While the industry has experienced revenue growth lately, Hangzhou Shenhao TechnologyLTD's revenue has gone into reverse gear, which is not great. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is Hangzhou Shenhao TechnologyLTD's Revenue Growth Trending?

In order to justify its P/S ratio, Hangzhou Shenhao TechnologyLTD would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a frustrating 31% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 8.2% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 193% as estimated by the lone analyst watching the company. With the industry only predicted to deliver 25%, the company is positioned for a stronger revenue result.

With this information, we can see why Hangzhou Shenhao TechnologyLTD is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Hangzhou Shenhao TechnologyLTD's P/S

The strong share price surge has lead to Hangzhou Shenhao TechnologyLTD'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.

Our look into Hangzhou Shenhao TechnologyLTD shows that its P/S ratio remains high on the merit of its strong future revenues. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless these conditions change, they will continue to provide strong support to the share price.

You should always think about risks. Case in point, we've spotted 2 warning signs for Hangzhou Shenhao TechnologyLTD you should be aware of, and 1 of them makes us a bit uncomfortable.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.