SDIC Intelligence Xiamen Information Co., Ltd. (SZSE:300188) shareholders are no doubt pleased to see that the share price has bounced 36% 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 6.8% in the last twelve months.

Following the firm bounce in price, SDIC Intelligence Xiamen Information may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 7.1x, when you consider almost half of the companies in the Electronic industry in China have P/S ratios under 4x and even P/S lower than 2x aren't out of the ordinary. 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 SDIC Intelligence Xiamen Information's Recent Performance Look Like?

SDIC Intelligence Xiamen Information could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. However, if this isn't the case, investors might get caught out paying too much for the stock.

How Is SDIC Intelligence Xiamen Information's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as SDIC Intelligence Xiamen Information's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered a frustrating 20% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 16% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Shifting to the future, estimates from the six analysts covering the company suggest revenue should grow by 49% over the next year. That's shaping up to be materially higher than the 25% growth forecast for the broader industry.

In light of this, it's understandable that SDIC Intelligence Xiamen Information's P/S sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

The strong share price surge has lead to SDIC Intelligence Xiamen Information's P/S soaring as well. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of SDIC Intelligence Xiamen Information's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.

And what about other risks? Every company has them, and we've spotted 1 warning sign for SDIC Intelligence Xiamen Information you should know about.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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