Those holding Qingdao Zhongzi Zhongcheng Group Co.,Ltd. (SZSE:300208) shares would be relieved that the share price has rebounded 30% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. But the last month did very little to improve the 81% share price decline over the last year.

Since its price has surged higher, given close to half the companies operating in China's Electrical industry have price-to-sales ratios (or "P/S") below 2x, you may consider Qingdao Zhongzi Zhongcheng GroupLtd as a stock to potentially avoid with its 3.3x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

How Has Qingdao Zhongzi Zhongcheng GroupLtd Performed Recently?

As an illustration, revenue has deteriorated at Qingdao Zhongzi Zhongcheng GroupLtd over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.

How Is Qingdao Zhongzi Zhongcheng GroupLtd's Revenue Growth Trending?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Qingdao Zhongzi Zhongcheng GroupLtd's to be considered reasonable.

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 54%. The last three years don't look nice either as the company has shrunk revenue by 24% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 23% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's alarming that Qingdao Zhongzi Zhongcheng GroupLtd'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 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.

The Key Takeaway

The large bounce in Qingdao Zhongzi Zhongcheng GroupLtd's shares has lifted the company's P/S handsomely. 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 Qingdao Zhongzi Zhongcheng GroupLtd 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.

There are also other vital risk factors to consider before investing and we've discovered 4 warning signs for Qingdao Zhongzi Zhongcheng GroupLtd that 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com