Niutech Environment Technology Corporation (SHSE:688309) shares have had a really impressive month, gaining 42% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 36% over that time.

Since its price has surged higher, you could be forgiven for thinking Niutech Environment Technology is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 14x, considering almost half the companies in China's Commercial Services industry have P/S ratios below 2.7x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

How Has Niutech Environment Technology Performed Recently?

For example, consider that Niutech Environment Technology's financial performance has been poor lately as its revenue has been in decline. 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. If not, then existing shareholders may be quite nervous about the viability of the share price.

Is There Enough Revenue Growth Forecasted For Niutech Environment Technology?

In order to justify its P/S ratio, Niutech Environment Technology would need to produce outstanding growth that's well in excess of the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 58%. The last three years don't look nice either as the company has shrunk revenue by 36% in aggregate. 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 28% shows it's an unpleasant look.

With this information, we find it concerning that Niutech Environment Technology 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. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What We Can Learn From Niutech Environment Technology's P/S?

Shares in Niutech Environment Technology have seen a strong upwards swing lately, which has really helped boost its P/S figure. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that Niutech Environment Technology currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

Before you settle on your opinion, we've discovered 2 warning signs for Niutech Environment Technology 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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