When close to half the companies in the Medical Equipment industry in China have price-to-sales ratios (or "P/S") below 5.2x, you may consider Shanghai General Healthy Information and Technology Co., Ltd. (SHSE:605186) as a stock to avoid entirely with its 10x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

How Has Shanghai General Healthy Information and Technology Performed Recently?

Shanghai General Healthy Information and Technology hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. 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.

Is There Enough Revenue Growth Forecasted For Shanghai General Healthy Information and Technology?

In order to justify its P/S ratio, Shanghai General Healthy Information and Technology would need to produce outstanding growth that's well in excess of the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 18%. This means it has also seen a slide in revenue over the longer-term as revenue is down 12% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Shifting to the future, estimates from the sole analyst covering the company suggest revenue should grow by 49% over the next year. With the industry only predicted to deliver 27%, the company is positioned for a stronger revenue result.

With this information, we can see why Shanghai General Healthy Information and Technology is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Shanghai General Healthy Information and Technology's P/S?

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.

As we suspected, our examination of Shanghai General Healthy Information and Technology'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. It's hard to see the share price falling strongly in the near future under these circumstances.

You always need to take note of risks, for example - Shanghai General Healthy Information and Technology has 2 warning signs we think you should be aware of.

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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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.