The Shenzhen InfoGem Technologies Co., Ltd. (SZSE:300085) share price has done very well over the last month, posting an excellent gain of 47%. Notwithstanding the latest gain, the annual share price return of 2.7% isn't as impressive.

Following the firm bounce in price, Shenzhen InfoGem Technologies may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 9.5x, when you consider almost half of the companies in the Software industry in China have P/S ratios under 4.3x 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 Shenzhen InfoGem Technologies' P/S Mean For Shareholders?

For example, consider that Shenzhen InfoGem Technologies' financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. However, if this isn't the case, investors might get caught out paying too much for the stock.

How Is Shenzhen InfoGem Technologies' Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Shenzhen InfoGem Technologies' 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 20%. As a result, revenue from three years ago have also fallen 36% overall. 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 26% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Shenzhen InfoGem Technologies' P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Bottom Line On Shenzhen InfoGem Technologies' P/S

Shares in Shenzhen InfoGem Technologies have seen a strong upwards swing lately, which has really helped boost its P/S figure. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of Shenzhen InfoGem Technologies revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

You should always think about risks. Case in point, we've spotted 2 warning signs for Shenzhen InfoGem Technologies you should be aware of.

If you're unsure about the strength of Shenzhen InfoGem Technologies' 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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