Chengdu Qinchuan IoT Technology Co.Ltd. (SHSE:688528) shareholders would be excited to see that the share price has had a great month, posting a 71% gain and recovering from prior weakness. Unfortunately, despite the strong performance over the last month, the full year gain of 8.5% isn't as attractive.

After such a large jump in price, you could be forgiven for thinking Chengdu Qinchuan IoT TechnologyLtd is a stock not worth researching with a price-to-sales ratios (or "P/S") of 4.8x, considering almost half the companies in China's Electronic industry have P/S ratios below 3.6x. 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.

What Does Chengdu Qinchuan IoT TechnologyLtd's Recent Performance Look Like?

Revenue has risen firmly for Chengdu Qinchuan IoT TechnologyLtd recently, which is pleasing to see. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors' willingness to pay up for the stock. If not, then existing shareholders may be a little nervous about the viability of the share price.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Chengdu Qinchuan IoT TechnologyLtd would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered a decent 10% gain to the company's revenues. The solid recent performance means it was also able to grow revenue by 20% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 26% shows it's noticeably less attractive.

In light of this, it's alarming that Chengdu Qinchuan IoT TechnologyLtd's P/S sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What We Can Learn From Chengdu Qinchuan IoT TechnologyLtd's P/S?

Chengdu Qinchuan IoT TechnologyLtd shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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.

The fact that Chengdu Qinchuan IoT TechnologyLtd currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

Before you take the next step, you should know about the 2 warning signs for Chengdu Qinchuan IoT TechnologyLtd that we have uncovered.

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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