Jouder Precision Industry (Kunshan) Co., Ltd. (SZSE:300549) shares have had a really impressive month, gaining 40% 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 13% over that time.

Since its price has surged higher, when almost half of the companies in China's Machinery industry have price-to-sales ratios (or "P/S") below 2.8x, you may consider Jouder Precision Industry (Kunshan) as a stock not worth researching with its 7.8x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

What Does Jouder Precision Industry (Kunshan)'s P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Jouder Precision Industry (Kunshan) 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. If not, then existing shareholders may be quite nervous about the viability of the share price.

Do Revenue Forecasts Match The High P/S Ratio?

Jouder Precision Industry (Kunshan)'s P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered a frustrating 22% 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 17% 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.

Comparing that to the industry, which is predicted to deliver 23% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this information, we find it concerning that Jouder Precision Industry (Kunshan) is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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 Does Jouder Precision Industry (Kunshan)'s P/S Mean For Investors?

The strong share price surge has lead to Jouder Precision Industry (Kunshan)'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.

We've established that Jouder Precision Industry (Kunshan) currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you settle on your opinion, we've discovered 4 warning signs for Jouder Precision Industry (Kunshan) (1 makes us a bit uncomfortable!) that you should be aware of.

If these risks are making you reconsider your opinion on Jouder Precision Industry (Kunshan), explore our interactive list of high quality stocks to get an idea of what else is out there.

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