Shenzhen EXC-LED Technology Co.Ltd (SZSE:300889) shares have continued their recent momentum with a 34% gain in the last month alone. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 4.9% over the last year.

Although its price has surged higher, you could still be forgiven for feeling indifferent about Shenzhen EXC-LED TechnologyLtd's P/S ratio of 2.1x, since the median price-to-sales (or "P/S") ratio for the Electrical industry in China is also close to 2.2x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

How Shenzhen EXC-LED TechnologyLtd Has Been Performing

The revenue growth achieved at Shenzhen EXC-LED TechnologyLtd over the last year would be more than acceptable for most companies. One possibility is that the P/S is moderate because investors think this respectable revenue growth might not be enough to outperform the broader industry in the near future. If that doesn't eventuate, then existing shareholders probably aren't too pessimistic about the future direction of the share price.

How Is Shenzhen EXC-LED TechnologyLtd's Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Shenzhen EXC-LED TechnologyLtd's to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 8.0% last year. However, this wasn't enough as the latest three year period has seen an unpleasant 11% overall drop in revenue. 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.

In light of this, it's somewhat alarming that Shenzhen EXC-LED TechnologyLtd's P/S sits in line with 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. There's a 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.

The Final Word

Shenzhen EXC-LED TechnologyLtd's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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 find it unexpected that Shenzhen EXC-LED TechnologyLtd trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more 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.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Shenzhen EXC-LED TechnologyLtd you should know about.

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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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.