Shanghai W-Ibeda High Tech.Group Co.,Ltd. (SHSE:688071) shares have had a really impressive month, gaining 32% after a shaky period beforehand. Still, the 30-day jump doesn't change the fact that longer term shareholders have seen their stock decimated by the 53% share price drop in the last twelve months.

After such a large jump in price, given close to half the companies operating in China's Electronic industry have price-to-sales ratios (or "P/S") below 3.6x, you may consider Shanghai W-Ibeda High Tech.GroupLtd as a stock to potentially avoid with its 5.4x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

How Shanghai W-Ibeda High Tech.GroupLtd Has Been Performing

While the industry has experienced revenue growth lately, Shanghai W-Ibeda High Tech.GroupLtd's revenue has gone into reverse gear, which is not great. 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.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Shanghai W-Ibeda High Tech.GroupLtd's to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 11%. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 16% in total. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Turning to the outlook, the next year should generate growth of 130% as estimated by the two analysts watching the company. That's shaping up to be materially higher than the 26% growth forecast for the broader industry.

In light of this, it's understandable that Shanghai W-Ibeda High Tech.GroupLtd's P/S sits above the majority of other companies. 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 W-Ibeda High Tech.GroupLtd's P/S?

Shanghai W-Ibeda High Tech.GroupLtd shares have taken a big step in a northerly direction, but its P/S is elevated as a result. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Shanghai W-Ibeda High Tech.GroupLtd's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. It's hard to see the share price falling strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 2 warning signs for Shanghai W-Ibeda High Tech.GroupLtd that you should be aware of.

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.