Zhejiang Yuejian Intelligent Equipment Co.,Ltd. (SHSE:603095) shares have continued their recent momentum with a 44% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 27% in the last year.

Following the firm bounce in price, given close to half the companies operating in China's Machinery industry have price-to-sales ratios (or "P/S") below 2.8x, you may consider Zhejiang Yuejian Intelligent EquipmentLtd as a stock to potentially avoid with its 4.6x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

What Does Zhejiang Yuejian Intelligent EquipmentLtd's Recent Performance Look Like?

For example, consider that Zhejiang Yuejian Intelligent EquipmentLtd's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is Zhejiang Yuejian Intelligent EquipmentLtd's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as high as Zhejiang Yuejian Intelligent EquipmentLtd's is when the company's growth is on track to outshine the industry.

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 5.9%. As a result, revenue from three years ago have also fallen 22% overall. 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 information, we find it concerning that Zhejiang Yuejian Intelligent EquipmentLtd 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 We Can Learn From Zhejiang Yuejian Intelligent EquipmentLtd's P/S?

The large bounce in Zhejiang Yuejian Intelligent EquipmentLtd's shares has lifted the company's P/S handsomely. 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 Zhejiang Yuejian Intelligent EquipmentLtd 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 3 warning signs for Zhejiang Yuejian Intelligent EquipmentLtd that we have uncovered.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.