Foshan Golden Milky Way Intelligent Equipment Co., Ltd. (SZSE:300619) shareholders are no doubt pleased to see that the share price has bounced 39% 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 48% in the last twelve months.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Foshan Golden Milky Way Intelligent Equipment's P/S ratio of 1.8x, since the median price-to-sales (or "P/S") ratio for the Machinery industry in China is also close to 2.2x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

How Has Foshan Golden Milky Way Intelligent Equipment Performed Recently?

For instance, Foshan Golden Milky Way Intelligent Equipment's receding revenue in recent times would have to be some food for thought. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. If not, then existing shareholders may be a little nervous about the viability of the share price.

What Are Revenue Growth Metrics Telling Us About The P/S?

In order to justify its P/S ratio, Foshan Golden Milky Way Intelligent Equipment would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a frustrating 12% decrease to the company's top line. Still, the latest three year period has seen an excellent 132% overall rise in revenue, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Comparing that to the industry, which is only predicted to deliver 24% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised revenue results.

In light of this, it's curious that Foshan Golden Milky Way Intelligent Equipment's P/S sits in line with the majority of other companies. Apparently some shareholders believe the recent performance is at its limits and have been accepting lower selling prices.

The Key Takeaway

Foshan Golden Milky Way Intelligent Equipment appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

To our surprise, Foshan Golden Milky Way Intelligent Equipment revealed its three-year revenue trends aren't contributing to its P/S as much as we would have predicted, given they look better than current industry expectations. There could be some unobserved threats to revenue preventing the P/S ratio from matching this positive performance. While recent revenue trends over the past medium-term suggest that the risk of a price decline is low, investors appear to see the likelihood of revenue fluctuations in the future.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 6 warning signs with Foshan Golden Milky Way Intelligent Equipment (at least 4 which shouldn't be ignored), and understanding these should be part of your investment process.

If these risks are making you reconsider your opinion on Foshan Golden Milky Way Intelligent Equipment, explore our interactive list of high quality stocks to get an idea of what else is out there.

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