Shanghai Huaming Intelligent Terminal Equipment Co., Ltd. (SZSE:300462) shares have had a really impressive month, gaining 37% after a shaky period beforehand. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 4.6% in the last twelve months.

Since its price has surged higher, you could be forgiven for thinking Shanghai Huaming Intelligent Terminal Equipment is a stock not worth researching with a price-to-sales ratios (or "P/S") of 3.3x, considering almost half the companies in China's Machinery industry have P/S ratios below 2.6x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

How Shanghai Huaming Intelligent Terminal Equipment Has Been Performing

As an illustration, revenue has deteriorated at Shanghai Huaming Intelligent Terminal Equipment 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. However, if this isn't the case, investors might get caught out paying too much for the stock.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Shanghai Huaming Intelligent Terminal Equipment would need to produce impressive growth 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 9.8%. This means it has also seen a slide in revenue over the longer-term as revenue is down 43% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 23% shows it's an unpleasant look.

With this in mind, we find it worrying that Shanghai Huaming Intelligent Terminal Equipment's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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 Shanghai Huaming Intelligent Terminal Equipment's P/S?

The large bounce in Shanghai Huaming Intelligent Terminal Equipment's shares has lifted the company's P/S handsomely. 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 Shanghai Huaming Intelligent Terminal Equipment 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. 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 take the next step, you should know about the 2 warning signs for Shanghai Huaming Intelligent Terminal Equipment that we have uncovered.

If these risks are making you reconsider your opinion on Shanghai Huaming Intelligent Terminal Equipment, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.