Zhangjiagang Zhonghuan Hailu High-End Equipment Co., Ltd. (SZSE:301040) shareholders have had their patience rewarded with a 27% share price jump in the last month. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 34% over that time.

After such a large jump in price, you could be forgiven for thinking Zhangjiagang Zhonghuan Hailu High-End Equipment is a stock not worth researching with a price-to-sales ratios (or "P/S") of 2.3x, considering almost half the companies in China's Metals and Mining industry have P/S ratios below 1.3x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

How Has Zhangjiagang Zhonghuan Hailu High-End Equipment Performed Recently?

For example, consider that Zhangjiagang Zhonghuan Hailu High-End Equipment's 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 Zhangjiagang Zhonghuan Hailu High-End Equipment's Revenue Growth Trending?

In order to justify its P/S ratio, Zhangjiagang Zhonghuan Hailu High-End Equipment would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered a frustrating 38% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 52% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 13% shows it's an unpleasant look.

With this in mind, we find it worrying that Zhangjiagang Zhonghuan Hailu High-End Equipment's P/S exceeds that of its industry peers. 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.

What Does Zhangjiagang Zhonghuan Hailu High-End Equipment's P/S Mean For Investors?

Zhangjiagang Zhonghuan Hailu High-End Equipment's P/S is on the rise since its shares have risen strongly. 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.

We've established that Zhangjiagang Zhonghuan Hailu High-End Equipment 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.

Before you take the next step, you should know about the 2 warning signs for Zhangjiagang Zhonghuan Hailu High-End Equipment (1 makes us a bit uncomfortable!) that we have uncovered.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.