Hainan Shennong Seed Industry Technology Co., Ltd. (SZSE:300189) shares have had a really impressive month, gaining 31% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 18% in the last twelve months.

Since its price has surged higher, when almost half of the companies in China's Food industry have price-to-sales ratios (or "P/S") below 1.5x, you may consider Hainan Shennong Seed Industry Technology as a stock not worth researching with its 16x 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.

What Does Hainan Shennong Seed Industry Technology's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Hainan Shennong Seed Industry Technology over the last year, which is not ideal at all. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is Hainan Shennong Seed Industry Technology's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Hainan Shennong Seed Industry Technology's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 2.3% decrease to the company's top line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 15% overall rise in revenue. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 16% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this information, we find it concerning that Hainan Shennong Seed Industry Technology is trading at a P/S higher than the industry. It seems most investors are ignoring the fairly limited recent growth rates 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 Key Takeaway

Hainan Shennong Seed Industry Technology's P/S has grown nicely over the last month thanks to a handy boost in the share price. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Hainan Shennong Seed Industry Technology revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Hainan Shennong Seed Industry Technology (1 is a bit unpleasant) 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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