Shaanxi Fenghuo Electronics Co., Ltd. (SZSE:000561) shareholders have had their patience rewarded with a 37% share price jump in the last month. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 6.6% in the last twelve months.

In spite of the firm bounce in price, Shaanxi Fenghuo Electronics' price-to-sales (or "P/S") ratio of 3.6x might still make it look like a buy right now compared to the Communications industry in China, where around half of the companies have P/S ratios above 4.7x and even P/S above 8x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

How Has Shaanxi Fenghuo Electronics Performed Recently?

While the industry has experienced revenue growth lately, Shaanxi Fenghuo Electronics' revenue has gone into reverse gear, which is not great. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.

Do Revenue Forecasts Match The Low P/S Ratio?

Shaanxi Fenghuo Electronics' P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

Retrospectively, the last year delivered a frustrating 8.8% 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 4.0% 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.

Shifting to the future, estimates from the one analyst covering the company suggest revenue should grow by 29% over the next year. With the industry predicted to deliver 42% growth, the company is positioned for a weaker revenue result.

In light of this, it's understandable that Shaanxi Fenghuo Electronics' P/S sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What Does Shaanxi Fenghuo Electronics' P/S Mean For Investors?

Shaanxi Fenghuo Electronics' stock price has surged recently, but its but its P/S still remains modest. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Shaanxi Fenghuo Electronics maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Shaanxi Fenghuo Electronics with six simple checks will allow you to discover any risks that could be an issue.

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.