The Sumavision Technologies Co.,Ltd. (SZSE:300079) share price has done very well over the last month, posting an excellent gain of 56%. Unfortunately, despite the strong performance over the last month, the full year gain of 4.8% isn't as attractive.

Since its price has surged higher, Sumavision TechnologiesLtd's price-to-sales (or "P/S") ratio of 17.1x might make it look like a strong sell right now compared to other companies in the Communications industry in China, where around half of the companies have P/S ratios below 4.7x and even P/S below 2x are quite common. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

What Does Sumavision TechnologiesLtd's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Sumavision TechnologiesLtd 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.

How Is Sumavision TechnologiesLtd's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Sumavision TechnologiesLtd'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 48%. This means it has also seen a slide in revenue over the longer-term as revenue is down 49% 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.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 42% shows it's an unpleasant look.

In light of this, it's alarming that Sumavision TechnologiesLtd's P/S sits above the majority of other companies. 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 Does Sumavision TechnologiesLtd's P/S Mean For Investors?

Sumavision TechnologiesLtd's P/S has grown nicely over the last month thanks to a handy boost in the share price. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Sumavision TechnologiesLtd 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. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Before you take the next step, you should know about the 2 warning signs for Sumavision TechnologiesLtd (1 is a bit unpleasant!) that we have uncovered.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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