Jiangsu Yitong High-Tech Co., Ltd. (SZSE:300211) shares have continued their recent momentum with a 52% gain in the last month alone. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 11% over that time.

After such a large jump in price, Jiangsu Yitong High-Tech may be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 21.1x, since almost half of all companies in the Communications industry in China have P/S ratios under 4.7x and even P/S lower than 2x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

What Does Jiangsu Yitong High-Tech's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Jiangsu Yitong High-Tech over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as steep as Jiangsu Yitong High-Tech's is when the company's growth is on track to outshine the industry decidedly.

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 55%. Regardless, revenue has managed to lift by a handy 16% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 42% shows it's noticeably less attractive.

With this information, we find it concerning that Jiangsu Yitong High-Tech is trading at a P/S higher than the industry. 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 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.

The Key Takeaway

The strong share price surge has lead to Jiangsu Yitong High-Tech's P/S soaring as well. 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.

The fact that Jiangsu Yitong High-Tech 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. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Jiangsu Yitong High-Tech you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.