The Sichuan Huati Lighting Technology Co.,Ltd. (SHSE:603679) share price has done very well over the last month, posting an excellent gain of 39%. Unfortunately, despite the strong performance over the last month, the full year gain of 6.3% isn't as attractive.

After such a large jump in price, you could be forgiven for thinking Sichuan Huati Lighting TechnologyLtd is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 4.8x, considering almost half the companies in China's Electrical industry have P/S ratios below 2.2x. 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.

How Sichuan Huati Lighting TechnologyLtd Has Been Performing

As an illustration, revenue has deteriorated at Sichuan Huati Lighting TechnologyLtd over the last year, which is not ideal at all. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. 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?

Sichuan Huati Lighting TechnologyLtd'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.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 11%. The last three years don't look nice either as the company has shrunk revenue by 29% in aggregate. 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.

In light of this, it's alarming that Sichuan Huati Lighting TechnologyLtd's P/S sits above the majority of other companies. 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.

The Key Takeaway

The strong share price surge has lead to Sichuan Huati Lighting TechnologyLtd's P/S soaring as well. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Sichuan Huati Lighting TechnologyLtd revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. 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 4 warning signs for Sichuan Huati Lighting TechnologyLtd (2 can't be ignored!) 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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