MGI Tech Co., Ltd. (SHSE:688114) shares have had a really impressive month, gaining 27% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 32% in the last twelve months.

Since its price has surged higher, you could be forgiven for thinking MGI Tech is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 7.8x, considering almost half the companies in China's Life Sciences industry have P/S ratios below 4.5x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

How MGI Tech Has Been Performing

MGI Tech has been struggling lately as its revenue has declined faster than most other companies. It might be that many expect the dismal revenue performance to recover substantially, which has kept the P/S from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.

How Is MGI Tech's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like MGI Tech's 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 19%. As a result, revenue from three years ago have also fallen 31% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 14% per year during the coming three years according to the six analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 21% per annum, which is noticeably more attractive.

With this in consideration, we believe it doesn't make sense that MGI Tech's P/S is outpacing its industry peers. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Bottom Line On MGI Tech's P/S

MGI Tech's P/S has grown nicely over the last month thanks to a handy boost in the share price. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Despite analysts forecasting some poorer-than-industry revenue growth figures for MGI Tech, this doesn't appear to be impacting the P/S in the slightest. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with MGI Tech, and understanding should be part of your investment process.

If you're unsure about the strength of MGI Tech's 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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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.