SafBon Water Service (Holding) Inc.,Shanghai (SZSE:300262) shareholders are no doubt pleased to see that the share price has bounced 34% 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 17% over that time.

After such a large jump in price, you could be forgiven for thinking SafBon Water Service (Holding)Shanghai is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 5.9x, considering almost half the companies in China's Water Utilities industry have P/S ratios below 2.3x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

What Does SafBon Water Service (Holding)Shanghai's P/S Mean For Shareholders?

With revenue growth that's exceedingly strong of late, SafBon Water Service (Holding)Shanghai has been doing very well. Perhaps the market is expecting future revenue performance to outperform the wider market, which has seemingly got people interested in the stock. However, if this isn't the case, investors might get caught out paying too much for the stock.

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as steep as SafBon Water Service (Holding)Shanghai's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered an explosive gain to the company's top line. Still, revenue has fallen 45% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 13% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that SafBon Water Service (Holding)Shanghai is trading at a P/S higher than the industry. 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 very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What We Can Learn From SafBon Water Service (Holding)Shanghai's P/S?

SafBon Water Service (Holding)Shanghai's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

We've established that SafBon Water Service (Holding)Shanghai currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

And what about other risks? Every company has them, and we've spotted 2 warning signs for SafBon Water Service (Holding)Shanghai (of which 1 is concerning!) you should know about.

If you're unsure about the strength of SafBon Water Service (Holding)Shanghai'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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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.