Despite an already strong run, Shenzhen Zhongheng Huafa Co., Ltd. (SZSE:000020) shares have been powering on, with a gain of 39% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 33% in the last year.

Since its price has surged higher, Shenzhen Zhongheng Huafa may be sending sell signals at present with a price-to-sales (or "P/S") ratio of 5.9x, when you consider almost half of the companies in the Electronic industry in China have P/S ratios under 4x and even P/S lower than 2x aren't out of the ordinary. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

What Does Shenzhen Zhongheng Huafa's Recent Performance Look Like?

Revenue has risen firmly for Shenzhen Zhongheng Huafa recently, which is pleasing to see. Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Is There Enough Revenue Growth Forecasted For Shenzhen Zhongheng Huafa?

Shenzhen Zhongheng Huafa's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 10%. Still, lamentably revenue has fallen 3.2% in aggregate from three years ago, which is disappointing. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 26% shows it's an unpleasant look.

With this in mind, we find it worrying that Shenzhen Zhongheng Huafa'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 We Can Learn From Shenzhen Zhongheng Huafa's P/S?

The large bounce in Shenzhen Zhongheng Huafa's shares has lifted the company's P/S handsomely. 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 Shenzhen Zhongheng Huafa currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Shenzhen Zhongheng Huafa that you should be aware of.

If you're unsure about the strength of Shenzhen Zhongheng Huafa'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.